Micronesia 2015 Profile

IMF Country Report No.
15/128
FEDERATED STATES OF
MICRONESIA
2015 ARTICLE IV CONSULTATION—STAFF REPORT;
May 2015
PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE
DIRECTOR FOR THE FEDERATED STATES OF MICRONESIA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with
members, usually every year. In the context of the 2015 Article IV consultation with the
Federated States of Micronesia, the following documents have been released and are
included in this package:
 The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on May 11, 2015, following discussions that ended on March 20, 2015, with
the officials of the Federated States of Micronesia on economic developments and
policies. Based on information available at the time of these discussions, the staff report
was completed on April 24, 2015.
 An Informational Annex prepared by the IMF.
 A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.
 A Press Release summarizing the views of the Executive Board as expressed during its
May 11, 2015 consideration of the staff report that concluded the Article IV consultation
with the Federated States of Micronesia.
 A Statement by the Executive Director for the Federated States of Micronesia.
The policy of publication of staff reports and other documents allows for the deletion of
market-sensitive information.
Copies of this report are available to the public from
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© 2015 International Monetary Fund

FEDERATED STATES OF
MICRONESIA
STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION
April 24, 2015
KEY ISSUES
Context. Raising growth and ensuring long-term fiscal sustainability remain the two
critical issues of the FSM. The reform agenda, in particular, the tax reform package and
growth-enhancing reforms, hinges on achieving a national consensus in a loosely
federated nation.
Outlook. The economy stagnated in FY2014 (ending September) with real growth
estimated at 0.1 percent, reflecting a slowdown in the implementation of infrastructure
projects. Inflation dropped to 0.7 percent in FY2014 on account of falling oil prices. The
current account strengthened due to a tax windfall from a company’s sale of shares
launched on a foreign stock exchange and an increase in fishing license fees. Growth in
FY2015 is expected to remain almost flat at 0.3 percent, while damages caused by the
recent typhoon Maysak could dampen the economy.
Fiscal sector. The authorities have started some reforms in view of the expiration in 2023 of
grants provided under the Compact of Free Association with the U.S. State governments
have started fiscal consolidation while the Unified Revenue Authority (URA) has been
established. The authorities agreed that more needs to be done to achieve fiscal
sustainability, in particular, by implementing the tax reform package that includes replacing
the state sales taxes with a VAT. They noted that further reforms hinge on achieving a
national consensus.
Investment climate. Land tenure issues continue to constrain private sector development
and the authorities should redouble efforts in expediting the land survey and
registration process. On tourism, the authorities expressed optimism that the recent
extension of the runway at the main island airport in Pohnpei could lead to more eco-
tourism that preserves the cultural heritage and pristine nature of the country.
Financial sector. Credit unions are currently not being supervised and a new legislation is
underway to put them under the supervision of the Banking Board. The authorities have
requested further TA from PFTAC and the Legal Department of the Fund.
FEDERATED STATES OF MICRONESIA
Approved By Discussions took place in Pohnpei from March 9–20, 2015. The
Patrizia Tumbarello mission comprised Messrs. Y. Yoneyama (head), I. Saito, M. Dalesio (all
and Masato Miyazaki APD). H. Lim (OED), L. Pan (World Bank Group) and N. Usui (AsDB)
participated in the key policy discussions.
CONTENTS
OVERVIEW _______________________________________________________________________________________ 3
ECONOMIC CONTEXT ___________________________________________________________________________ 4
POLICIES TO ACHIEVE SUSTAINABLE GROWTH _______________________________________________ 5

A. Fiscal Policy ____________________________________________________________________________________ 5
B. Enhancing Private Sector Growth _______________________________________________________________ 8
C. Preserving Financial Stability to Support Growth _______________________________________________ 9
D. External Stability ______________________________________________________________________________ 10
E. Other Issues ___________________________________________________________________________________ 11
STAFF APPRAISAL _____________________________________________________________________________ 11
BOXES
1. The “2013 Action Plan” and Its Economic Growth Strategy ____________________________________ 13
2. Long-term Outlook on Trust Funds____________________________________________________________ 14
3. Fisheries Sector in the FSM Economy __________________________________________________________ 16
FIGURES
1. Economic Developments ______________________________________________________________________ 18
2. Regional Comparison of Recent Developments _______________________________________________ 19
TABLES
1. Selected Economic Indicators, FY2010–15 _____________________________________________________ 20
2. General Government Operations, FY2010–20__________________________________________________ 21
3. Indicators of Financial and External Vulnerability, FY2010–20 _________________________________ 22
4. Deposit Money Banks, FY2010–14 _____________________________________________________________ 23
5. Balance of Payments, FY2010–20 ______________________________________________________________ 24
6. Medium-term Scenario, FY2013–25 ___________________________________________________________ 25
7. Millennium Development Goals (MDGs) Indicators ____________________________________________ 26
APPENDICES
I. Staff Policy Advice from the 2012 Article IV Consultation ______________________________________ 27
II. Risk Assessment Matrix________________________________________________________________________ 28
2 INTERNATIONAL MONETARY FUND

OVERVIEW
1. Context. The Federated States of Geographical Dispersion: Average Sea Distance Between
Micronesia (FSM) is a microstate in the Pacific Two Inhabitants of the Same Country
(In kilometers)
with one of the most dispersed population in the 700
world. It is highly dependent on external aid, 600
500
mainly from the United States. The FSM has a 400
loosely federated structure, with four states each 300
200
having its own executive and legislative bodies. 100
This makes decision making at the national level 0
Micronesia
Samoa
Tuvalu
Fiji
Tonga
Kiribati
Vanuatu
Palau
Solomon Islands
Marshall Islands
difficult – a number of reform agendas are
experiencing protracted delays.
2. Growth and social indicators. The

private sector has yet to become the engine of Micronesia: Millenium Development Goals (MDGs) Progress
growth for the economy, and caters largely to MDG 1. Eradicate extreme poverty and hunger
Halve between 1990 and 2015 the proportion of people whose Off track
the needs of the public sector. FSM’s average income is less than $1 per day.
annual growth rate between FY20051 and 2013 MDG 2. Achieve universal primary education Mixed
was close to zero and is worse than other MDG 3. Promote gender equality and empowerment
Eliminate gender disparities in primary and secondary Mixed
countries in the Pacific2 (Figures 1 and 2). The education.
FSM is endowed with bountiful natural resources MDG 4. Reduce child (under 5) mortality by two thirds On track
and has a strong tradition of caring and sharing MDG 5. Improve maternal health
Off track
Reduce maternal mortality by three quarters.
through the extended family. While there are no MDG 6. Reverse the spread of HIV/AIDS, malaria and TB Mixed
data to track hunger in the FSM, the fact that a MDG 7. Ensure environmental sustainability
relatively small proportion of the population Integrate principles of sustainable development into country On track
policies.
(11 percent) live below the national food poverty Source: 2013 Pacific Regional MDG Tracking Report, Pacific Islands Forum Secretariat.
line suggests that extreme poverty and poverty-
caused hunger are not widespread3, while the disappointing growth has had some negative impact
on the progress of Millennium Development Goals.
3. Long-term fiscal challenge. The FSM faces a long-term fiscal challenge as US grants
provided under the Compact of Free Association (Compact grants) will expire in FY2023. Compact
grants disbursed in FY2013 for current and capital spending amounted to about 25 percent of GDP4,
accounting for more than 40 percent of the general government revenue. The authorities have
recently produced the “2023 Action Plan” with the view to addressing the long-term fiscal challenge
while accelerating the economic growth (Box 1). At this juncture, most of the policy actions included
in the Action Plan, including the tax reform package that will play a critical role in enhancing the
fiscal revenue, remain to be endorsed by the legislatures.
1
The fiscal year runs from October to September (for example, FY2015 covers October 2014 to September 2015).
2
Average annual growth rate in the Pacific during the same period was about 2 percent.
3
Millennium Development Goals and the Federated States of Micronesia Status Report 2010, FSM Office of Statistics,
Budget, and Economic Management, Overseas Development Assistance, and Compact Management.
4
If contributions to the CTF are included, the ratio is more than 30 percent of GDP.
INTERNATIONAL MONETARY FUND 3

4. Trust funds. A portion of the Compact grants have been disbursed into the Compact Trust
Fund (CTF), jointly managed by the US and the FSM, with the view that returns from the trust fund
would be sufficient to enable Micronesia to become fiscally sustainable after FY2023. The FSM has
also established its own trust fund (FSM Trust Fund). However, at current pace of accumulation,
returns from these funds are expected to fall short of the expired Compact grants in FY2023 – hence
the need to step up fiscal consolidation and growth-enhancing structural reforms.
ECONOMIC CONTEXT
5. Growth. The economy is stagnating. While delays in the compilation of economic data have
hampered the assessment of the economy, staff estimates real GDP growth to be around
0.1 percent for FY2014. Externally-funded infrastructure projects are moving slowly: land tenure
issues continue to hold back the implementation of some projects while delays in updating the
infrastructure development plan of 2004 have resulted in the temporary suspension of Compact
infrastructure grants for new projects. Falling oil prices resulted in the decline of CPI from
2.1 percent in FY2013 to 0.7 percent in FY2014.
Micronesia: Selected Economic Indicators, FY2011-15

FY2011 FY2012 FY2013 FY2014 FY2015
Est. Proj.
(year-on-year percent change)
Real GDP 1.8 0.1 -4.0 0.1 0.3
Consumer price index 4.3 6.3 2.1 0.7 -1.0
(in percent of GDP)
General government revenue 65.0 66.0 62.3 68.6 61.9
Tax revenues 12.1 11.6 12.2 19.5 13.0
Corporate tax 0.7 0.8 1.4 8.8 2.4
Foreign grants 1/ 44.3 43.1 35.5 31.2 31.0
Current 27.2 25.2 25.6 25.4 25.2
Capital 17.1 18.0 9.9 5.7 5.8
Fishing license fees 6.1 8.1 11.1 14.9 14.9
General government expenditures 65.6 65.3 59.6 56.1 59.0
General government balance -0.6 0.8 2.8 12.5 2.8
Current account balance -17.9 -12.6 -10.1 2.5 -0.7
Trade balance -43.4 -38.6 -41.7 -41.0 -37.7
Income (net, including fishing license fees) 3.5 5.0 8.7 14.1 14.2
Transfers (private and official) 36.0 33.9 35.3 41.8 35.3
Sources: FSM authorities and Fund staff estimates.
1/ Does not include contributions to the Compact Trust Fund.
6. External balance. The current account improved from a deficit of -10 percent of GDP in
FY2013 to 2½ percent of GDP in FY2014. The main driving force behind this was a tax windfall from
a company’s sale of shares launched on a foreign stock exchange and an increase in fishing license
fees. Staff projects that the fishing license fee will stay at the same level in the medium term. Export
of goods, at around 15–16 percent of GDP, continues to be concentrated in exports of tuna to
Thailand and other East Asian countries.
7. Outlook. The economy is expected to be sluggish in FY2015, as the difficult business climate
will continue to hamper private sector growth while the implementation of externally-financed
infrastructure projects is likely to experience further delays. Damages caused by the recent Typhoon

Maysak5 could further dampen the economy. The continued pass through of low oil prices will result
in further decline in consumer prices. In this context, staff projects growth at 0.3 percent for FY2015.
8. Risks to the outlook. Overall, risks are tilted to the downside (Appendix 2). The loosely
federated structure of the country could result in further delays of the much-awaited reform agenda.
While the “2023 Action Plan” shows a number of essential reforms for the future of the FSM, it
remains a plan that needs to be underpinned by a multitude of legislative measures. Natural
disasters such as tropical cyclones could cause damages that are significant compared to the small
size of the economy. On the upside, further decline in oil prices and faster-than-expected
implementation of structural reforms could boost the economy. As the Micronesian economy is
heavily dependent on the public sector and foreign grant assistance, changes in the global economy
would not have much impact. However, it may affect the tourism industry that the authorities are
promoting.
9. Authorities’ view. The authorities broadly agreed with staff on the outlook. They shared the
view that achieving national consensus to implement the policy actions included in the “2023 Action
Plan” will be the key to boost the economy and ensure long-term fiscal sustainability beyond the
expiration of Compact grants in 2023. In this regard, the authorities noted that an extensive public
awareness campaign has been put in place to gain a nationwide support, including in places outside
of the country (e.g., Guam and Hawaii) where there is a large Micronesian community.
POLICIES TO ACHIEVE SUSTAINABLE GROWTH

A. Fiscal Policy
10. Recent developments. Fiscal revenue excluding foreign grants increased in FY2014 by
10 percent of GDP, on account mostly of higher fishing license fees (4 percent of GDP) and a tax
windfall from a company’s sale of shares launched on a foreign stock exchange (7 percent of GDP).
Against this backdrop, the national government transferred $30 million (10 percent of GDP) to the
trust funds out of the surplus realized in FY2014 and plans to allocate more funds for infrastructure
in FY2015. State governments have started fiscal consolidation efforts under their respective Long-
Term Fiscal Frameworks (LTFF), which envisages a contraction of current expenditures by 2 percent
per year on average in real terms. Taking all these into account, staff estimates that the overall fiscal
surplus will decline to 3 percent of GDP in FY2015 from 10 percent in FY2014.
5
Typhoon Maysak traversed the Chuuk and Yap states between March 29 and April 1, 2015. While assessments of
the damages are still on-going, 4 fatalities resulting from the storm have been confirmed and about 30,000 people
are affected in the states of Chuuk and Yap. In light of disaster assistance agreements between the FSM and the U.S.
under the Compact of Free Association, the U.S. Agency for International Development (Office of U.S. Foreign
Disaster Assistance) is providing humanitarian assistance to Micronesia (humanitarian assistance provided so far
amounts to $2.3 million). United Nations and other countries, including Marshall Islands, Australia, China, and Japan,
are also providing emergency assistance.

11. Medium-term fiscal framework. The authorities should formulate a medium- to long-term
fiscal framework that covers both the national and state governments, with a view to achieving
budgetary self-reliance in the post-2023 period. To this end, an inclusive process underpinned by
extensive consultations with stakeholders across the country will be critically important – this will
help ensure that the fiscal strategy can be implemented with the required legislative measures over
a medium term. The framework should adopt the outstanding value of the trust funds (Compact
Trust Fund and FSM Trust Fund) in percent of GDP as the fiscal anchor.
 Target value of the trust funds asset (see Box 2). The trust funds value should reach 340 percent
of GDP in FY2023 through a combination of increased revenue efforts and expenditure reforms.
At this level, the trust funds will be able to generate sufficient returns to make up for the
expiration of the Compact grants in FY2024. Even after adjusting the annual draw downs with
the inflation rate, trust funds value will remain around 300 percent of GDP in FY2034.
12. Tax reform and tax administration. The Tax Revenue, 2013
long-debated tax reform package should be (In percent of GDP)
35
implemented over a period of 4 years starting from 30
Income Tax
International Trade Taxes
FY2016, generating additional tax revenue of 25
Others
20
4 percent of GDP when fully implemented 15
(1 percent of GDP per year). Micronesia’s tax 10
revenue is low (12–13 percent of GDP), while the 5

0
average in the Pacific is close to 20 percent of GDP.
Tonga
Samoa
Micronesia
Marshall Islands
Fiji
Kiribati
Vanuatu
Palau
Solomon Islands
Tuvalu
The mission welcomes the recent establishment of
the Unified Revenue Authority (URA) by the national
and 2 state governments (Chuuk and Kosrae). The Source: Fund staff estimates.
URA should be extended to cover the remaining

two states (Pohnpei and Yap) while further enhancing tax compliance, in particular of large tax
payers. At the request of the authorities, PFTAC has recently started to provide TA in this area.
Main elements of the tax reform package

Abolish import duties and state sales taxes
1. Indirect tax
Introduce a new VAT (at a rate of 10 percent)
Abolish the Gross Revenue Tax (at a rate of 3 percent)
2. Business tax
Introduce a new Net Profit Tax (at a rate of 25 percent) 1/
Reduce the Gross Wage and Salary Tax (6 percent for the first $11,000; 10 percent of
3. Payroll tax
amounts over $11,000) by introducing a $5,000 tax free threshold.
Establish a Unified Revenue Authority (URA)
4. Tax administration
URA acts as an agent on behalf of the national and state governments
Source: FSM authorities
1/ Major corporations are already subject to a corporate income tax.

13. Expenditure reform. Staff welcomes the Government Current Expenditures, 2014
(In percent of GDP)
recent start of fiscal consolidation efforts at the state 70
level under the LTFF. However, more needs to be 60 Wage expenditure Other current expenditure
done to achieve the targeted value of the trust funds 50
(340 percent of GDP) in FY2023. This will require 40

Average of Pacific Island Countries
30
additional fiscal consolidation of 1 percent of GDP
20
and the LTFF should be extended to the national 10
government as well. Fiscal consolidation should be 0
accompanied by improvement in the quality of public
Tonga
Micronesia
Samoa
Vanuatu
Fiji
Kiribati
Solomon Is.
PNG
Palau
Marshall Is.
spending, so as to safeguard priority spending in the
social sector and infrastructure investment with high Sources: Country authorities; and Fund staff estimates.
development impact. Micronesia’s overall wage

expenditure, at 22 percent of GDP, is among the highest in the Pacific. Better coordination between
the national and state governments could result in savings by minimizing redundancies of functions
between the two levels of governments. While qualifications required for private and public sector
may not be fully comparable, public sector wage should continuously be reviewed6. The national
government is undertaking a public administration reform project, which includes the review of staff
number, pay structure and staff grading. The state governments are reviewing their expenditure
including the wage bill under the LTFFs. PFTAC is providing TA to strengthen Public Financial
Management and improve the quality of spending with limited resources.
14. Transfer of fiscal surplus to the trust funds. Staff welcomes the recent transfer of
$30 million to the FSM Trust Fund, thus saving the fiscal surplus resulting from the tax windfall from
a company’s sale of shares launched on a foreign stock exchange and the increase in the fishing
license fee revenue in FY2014. Going forward, fiscal surpluses should continue to be transferred in
full to the trust funds. The trust funds should continue to be managed prudently to ensure that
funds are appropriately managed for the post-2023 period.
15. Externally-funded infrastructure projects. The unused balance of already allocated

Compact grants for infrastructure projects reached almost US$ 140 million (about 40 percent of
GDP) at the end of FY2014. Authorities should work closely with all the stakeholders to address the
issue, including by updating the infrastructure development plan of 2004 with TA from the ADB in
order to prioritize projects in light of their development effectiveness and implementation capacity
of each state7. Improving the planning and management of the projects, in particular through better
coordination between the national government and state governments, would also be important.
16. Authorities’ Views. The authorities broadly agreed with the staff view of the overall
strategy.
 The authorities emphasized that achieving national consensus across the four states and the
national government for both the expenditure and revenue reforms will be critically important.
6
Average wage of the public sector is twice the level of the private sector.
7
Updating the infrastructure development plan of 2004 is also a requirement by the donor, along with other
measures to ensure proper management of projects.

They noted that the “2023 Action Plan” calls for the implementation of a number of policy
actions, including the tax reform package which should be implemented by FY2018 by both the
national and state governments.
 The authorities noted that the national government has recently developed a Public Financial
Management Roadmap to achieve improved transparency in accounting for public funds and
increased availability of information on annual budgets and financial statements.
B. Enhancing Private Sector Growth
17. Background. Improving the investment climate is key in achieving private sector-led growth
in the FSM. Currently, FSM’s overall investment climate is ranked among the worst in the Pacific
(145th among 189 economies in the world). Structural issues, including in the area of land ownership,
combined with the remoteness of the country, are key bottlenecks for private sector development.
Private sector is largely dependent on the public sector, and is not an engine of growth as of now.
 Land tenure issue. In the FSM, most properties are held as family trusts and land use rights are
passed down from generation to generation within the extended family. This makes it difficult
for potential investors to secure a long-term land lease. Use of land as collateral is also difficult
due to family ownership of the land, which is compounded by uncertain boundaries and titles.
While complex in nature and closely related to the local traditions, the authorities should
redouble efforts at land reform, including by expediting the land survey and registration.
 Tourism. FSM’s tourism income (7 percent of GDP

Tourism Income, 2013
in 2013) lags behind several of its peers in the (In percent of GDP)
Pacific. The recent grant-financed extension of the 60
50
runway at Pohnpei Airport could open the way for 40
expanding tourism. The authorities are making 30
20
efforts to establish direct air connections to 10
destinations in Asia, including by signing open sky 0

Micronesia
Samoa
Fiji
Tuvalu
Vanuatu
Palau
Solomon Islands
Marshall Islands
agreements and arranging chartered flights.

Nonetheless, the issue of land ownership will be a
crucial factor in developing tourism, including the Source: Fund staff estimates.
availability of land for new hotel investment. Also, attention needs to be paid to safeguard the
cultural heritage and pristine nature of the country, key to achieving national consensus for the
promotion of tourism.
 Others. The “2023 Action Plan” reconfirms the challenges pointed out by the World Bank
Group’s Doing Business Report persist, including the time required in resolving a commercial
dispute before local courts (5.3 years on average) and the elevated cost for creditors in
recovering debt from insolvent debtors (average recovery rate is 3.3 cents on the dollar). Review
of applications for inward foreign direct investment should be expedited.

Ease of Doing Business, 2015

Micronesia: Ease of Doing Business, 2015 (Rank out of 189 countries) 1/
(Rank out of 189 countries) 1/
160
Registering Property 189 140
Protecting Minority Investors 186 120 Other small states (mean)
Enforcing Contracts 162 100

Small Pacific island countries (mean)
80
Starting a Business 151
60
Resolving Insolvency 118
40
Paying Taxes 114 20
Trading Across Borders 106 0
Micronesia
Samoa
Tonga
Fiji
Kiribati
Palau
Vanuatu
Solomon Islands
Marshall Islands
Getting Credit 61
Dealing with Construction Permits 37
Getting Electricity 30
0 50 100 150 200

Source: World Bank, Doing Business Report 2015.
Source: World Bank, Doing Business 2015. 1/ Highest rank = 1; lowest rank = 189.
1/ Highest rank = 1; lowest rank = 189.
18. Authorities’ Views. The authorities broadly agreed with the assessment by staff that a more
robust private sector is indispensable for the future of the FSM, and emphasized that a number of
policy actions are included in the “2023 Action Plan”. They also explained that they plan to receive
TA from the World Bank Group to review all investment and other relevant laws in the FSM to
identify areas of discrepancies. To facilitate foreign direct investment, the authorities are considering
establishing an Investment Promotion Agency at the national level to act as a one-stop-shop.
C. Preserving Financial Stability to Support Growth
19. Background. The difficult business Deposit accounts with commercial banks, 2013
(Per 1,000 adults)
environment, in particular, complexities in securing a 1800
land lease and using land as collateral, has resulted in 1600

1400
the scarcity of bankable projects. At the same time, 1200
the number of deposit accounts with commercial 1000

Average
banks8 per 1,000 adults reached 565 in 20139, 800
600
increasing by more than 30 percent since 2004. 400
Reflecting the lack of bankable projects, the loan-to- 200

0
deposit ratio of commercial banks is very low at Palau Samoa Fiji Tonga FSM PNG Solomon Kiribati
Isl.
24 percent in FY2014 and the majority of deposits are Sources: IMF, Financial Access Survey.
invested overseas in safe financial assets10 (Table 4).
20. Credit unions. While commercial banks are well-capitalized and have sufficient liquidity and
subject to the supervision of the Banking Board, credit unions, while small in their size, are not
subject to any prudential oversight. Staff welcomes on-going initiative by the authorities to enact a
new Credit Union Act that will place credit unions under the supervision of the Banking Board, with
TA provided by PFTAC and the Legal Department of the Fund.
21. Authorities’ views: The authorities emphasized that they have been working closely with
PFTAC and the Legal Department of the Fund to prepare a Credit Union Act that will expand the
8
There are two commercial banks in the FSM: one local bank and a U.S. bank. The two banks are covered by the U.S.
Federal Deposit Insurance Corporation.
9
The average in the Pacific in 2013 was about 800 accounts per 1,000 adults, though data was not available for
3 countries (Marshalls, Tuvalu and Vanuatu).
10
As deposits are mostly short term, so are the foreign assets. This helps reduce the market risk of the banks.

supervisory mandate of the Banking Board over credit unions. They also noted the need to achieve a
national consensus in order to have the new law approved by the legislature. On the business
environment, the authorities reiterated the importance of implementing the policy actions included
in the “2023 Action Plan”, in particular, those related to regulatory and land reforms.
D. External Stability
22. Background. Risks to external stability are limited, as current account deficits have mostly
been financed by non-debt creating foreign capital grants for infrastructure projects. While the trade
and service balance had a large deficit, it was partially offset by official transfers and fishing license
fees. Compact-related grants will continue to provide a stable source of funding until FY2023.
However, under the baseline scenario that does not Micronesia: Net Oil Imports and International Prices
envisage major policy actions, the authorities will have 16 120
to take on concessional external loans from FY2024 14 Crude Oil Price (US$) [RHS] 1/
100
onwards in order to safeguard priority developent 12 Net Oil Imports (% of GDP)

80
10
spending, leading to the breach of some debt 8 60
indicators (see DSA Annex). 6
40
4
23. Impact of lower oil price. The FSM is a net

20
2
importer of petroleum products, thus benefitting from 0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
a recent decline in energy prices. Micronesia’s net Sources: FSM authorities; and Bloomberg.
import of petroleum products have been increasing 1/ Simple average of Brent, Dubai, and WTI.
over the past two decades, rising from 4 percent of

Micronesia: Fish Exports and Prices 1/
GDP in FY1995 to 12 percent in FY2013. This has
partly reflected the increase in oil prices while changes
14 3,000
12 Exports of Fish (% of GDP)

in the way of life of Micronesians have led to a
2,500
10 Price of Tuna (US$ per ton) [RHS]
gradual shift to use of modern forms of energy. A
2,000
8
decline in oil prices is expected to have positive 6

1,500
impact as the FSM is a net oil importer – a 10 percent 4

1,000
decline in the imported price of petroleum products is 2 500
estimated to improve the current account balance by 0 0

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
11 2013
around 1 percent of GDP . To reduce its reliance on 1/ Four-quarter moving average.
imported petroleum products, the FSM has started to

Sources: Country authorities; Globe Fish, Ministry of Trade of Thailand; and Fund
staff estimates.
work with development partners to invest in

renewable energy, in particular in outlying islands where the cost of electricity generation tends to
be elevated.
24. Real exchange rate. Micronesia’s real exchange rate has been evolving in line with its
neighboring countries in the Pacific, and is driven by changes in the price of imported food and fuel.
The real effective rate appreciated by 5 percent between 2010 and 2013, before stabilizing in 2014
(Figure 2), but does not seem to have had much impact on Micronesia’s export that is heavily
concentrated on tuna fish (see Box 3 on the fisheries sector). Fish export increased from 7 percent of
11
Kazuaki Washimi, April 2015, “Small States of the Pacific – Impact of Lower Oil Prices”, IMF Asia and Pacific Small
States Monitor.

GDP in FY2010 to 9 percent of GDP in FY2013, reflecting the increase in the international price of
tuna.
25. Authorities’ view. The authorities broadly shared the view that lower oil prices would have
some positive impact on the economy. They also noted that utilities companies have already started
to lower the electricity tariff to pass on the lower price of imported diesel. The authorities mentioned
that the use of the U.S. dollar as the domestic currency remains appropriate for the FSM given its
limited administrative capacity for independent monetary and exchange rate policies.
E. Other Issues
26. Statistics. Improving the reliability, coverage, and timeliness of economics statistics is
critically important to better guide policies. Staff notes ongoing efforts by authorities to improve
data collection and management, including by the Office of Statistics, Budget and Economic
Management, Overseas Development Assistance, and Compact Management (SBOC) and the
Banking Board. Micronesia has started reporting to the Fund fiscal data using the Government
Finance Statistics Manual 2001 (GFSM 2001) format since FY2013. Annual balance of payments and
international investment position statistics are also reported to the Fund since 2014. The authorities
are encouraged to further build statistical capacity, drawing on TA provided by the Statistical
Department of the Fund and PFTAC.
STAFF APPRAISAL
27. Outlook. Medium-term growth prospects in the FSM remain weak as the private sector
remains sluggish while fiscal challenges loom ahead, in particular, the expiration of Compact grants
in FY2023. However, policy actions included in the “2023 Action Plan” can strengthen the economic
prospects of the FSM, if they can be implemented by achieving countrywide consensus across the
national and four state governments.
28. Fiscal policy. The authorities should formulate a realistic medium-term fiscal framework that
covers both the national and state governments, with a view to achieving budgetary self-reliance in
the post-2023 period. The outstanding value of the trust funds in FY2023 should be used as the
fiscal anchor to guide policy actions, including the implementation of the long-debated tax reform
package and the extension of the LTFF to the national government; the transfer of fiscal surplus to
the trust funds; and the widening of the URA coverage to the remaining two state governments.
Fiscal consolidation efforts should be accompanied by improvement in the quality of public
spending, so as to safeguard priority spending in the social sector and infrastructure investment
with high development impact. The infrastructure development plan of 2004 should be updated as
soon as possible to help expedite the release of Compact funds for infrastructure projects.
29. Private sector. Improving the investment climate is key to achieving private sector-led
growth in the FSM. Growth-enhancing policy actions need to be undertaken, including addressing
land tenure issues by expediting the land survey and registration, and facilitating foreign direct
investment while paying particular attention to safeguard the cultural heritage and pristine nature of
the country.

30. Financial sector. The commercial banking sector is sound with adequate capital and ample
liquidity. Staff welcomes the authorities’ efforts to strengthen the regulatory framework of credit
unions, including by preparing a new Credit Union Act to place them under the supervision of the
Banking Board.
31. External sector. Risks to external stability are currently limited because the current account
deficits are financed by official grants. The use of the U.S. dollar as the official currency remains
appropriate given the small size of the economy and its close financial and trade linkages with the
United States.
32. It is recommended that the next Article IV consultation take place on the 24 month cycle.

Box 1. Micronesia: The “2023 Action Plan” and Its Economic Growth Strategy
Context. The FSM is facing fiscal and economic challenges as grants from the United States under the
Compact of Free Association will expire in 2023 while investment returns from the trust funds (Compact Trust
Fund and the FSM Trust Fund) are expected to be insufficient to replace them. The Strategic Development
Plan of 2004-2023, while comprehensive in the coverage of planned policy actions, has not materialized in
most part and the average real growth rate between 2004 and 2013 is disappointing at -0.4 percent.
2023 Planning Committee. In March 2012, the authorities established the “2023 Planning Committee”.
Composed of the President and the four state Governors, with the secretariat provided by the national
government (SBOC: Office of Statistics, Budget and Economic Management, Overseas Development
Assistance, and Compact Management). Since the draft Action Plan was unveiled in November 2014, an
extensive public awareness campaign has been launched to get a nationwide support, including in places
outside of the country (e.g., Guam and Hawaii) where there is a large Micronesian community.
Scope and timeline. At the core of the Action Plan is the strengthening of the private sector while reducing
reliance on the public sector as a driver of economic growth. In this context, the Action Plan aims at achieving
a medium-term growth rate of 2 percent per year once all the proposed action plans are implemented, with
the endorsement of the national and state legislatures. To this end, the Action Plan envisages policy actions in
the following three areas: i) growth through structural reforms; ii) revenue mobilization (tax reforms to
generate additional revenue of 4 percent of GDP); and iii) expenditure control (public administration reforms
to have the expenditures track inflation levels). While the Action Plan has a time-bound results-based
management matrix, a number of its policy actions, in particular, those in the fiscal and regulatory areas,
require legislative measures. Achieving consensus in a nation with a loosely federated structure will be the key
for the implementation of policy actions.
Key components of the economic growth strategy under the 2023 Action Plan
I. Cross-cutting agenda
1. Regulatory reform Enhance investor protection and transparency in investment (with IFC)
2. Land reform Complete land survey and record land titles available for development
Support entrepreneurial development, including by providing training to SMEs for the
3. Capacity building of development of managerial skills. Seed money could be provided from the new Investment
and financing to Development Fund (to be established subject to legislative approval). The FSM Development Bank
entrepreneurs will further strengthen its focus on development lending, in particular to small businesses, in line
with its Mission Statement.
II. Sector-specific agenda
1. Tourism Develop human resources and hotel capacity, including by attracting foreign investment
Increase subsistence production and local processing
2. Agriculture
Increase production of speciality crops (e.g., pepper, coffee) for export
Promote domestic fishing - both inland and coastal, processing and vessel servicing
3. Fishery
Develop acquaculture, including in the area of trochus shells
Develop renewable energy while enhancing efficiency of existing diesel-fueled power stations
4. Energy
(with IDA and ADB)
5. Information and Pursue more competition in the telecommunications sector
communications FSM-Palau regional connectivity project (submarine cables, with IDA)
Update the Infrastructure Development Plan of 2004 (with ADB) and pursue the gradual release
6. Infrastructure
of Compact infrastructure grants
Source: FSM authorities

Box 2. Micronesia: Long-term Outlook on Trust Funds
Context. Micronesia has two trust funds to better prepare Micronesia: Compact Trust Fund
for the post-2023 period: The Compact Trust Fund (CTF) 1 (US Million Dollars)
450 450
which is jointly managed by the US and the FSM; and the 400
Self contribution Contributions from US
400
Investment gains CTF value
FSM Trust Fund which is managed by the national 350 350
government. In FY2014, CTF had a balance of $381 million 300 300
250 250
(120 percent of GDP) whereas the FSM Trust Fund had a 200 200
balance of $33 million (11 percent of GDP). Returns from the 150 150
trust funds have been volatile. In FY2008, CTF net return was 100 100
50 50
negative 19 percent, substantially eroding the market value 0 0
of the fund. It experienced further negative returns in -50
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-50
FY2009 and 2011, while gains in FY2010 reached 13 percent. Source: FSM authorities.
Average return between FY2012–14 was 12 percent, offsetting negative performances in FY2008, FY2009 and
FY2011.
Scenarios: Two scenarios are considered to assess the

Micronesia: Consolidated General Government Balance
long-term outlook and the implications for the FSM’s fiscal (Percent of GDP)
10.0%
sustainability. Long-term self-sufficiency is assumed to be
Baseline Scenario 1/ Policy Action Scenario 2/
8.0%
achieved if after FY2023 the CTF, together with the FSM
Trust Fund, can generate enough investment income to 6.0%
cover the reduction in Compact grants without eroding the 4.0%
real value of the trust funds. 2.0%
Baseline Scenario 0.0%
This scenario follows the assumptions adopted in the main -2.0%

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
text and the baseline in the DSA annex. Main assumptions

Sources: FSM authorities and Fund staff estimates.
include: a fiscal surplus of 2–3 percent of GDP until FY2023 on account of sustained fishing license fee revenue
and some restraints on expenditures; half of the surplus will be transferred to the trust funds; and medium-
term real GDP growth of 0.6 percent. Investment returns from the trust funds are assumed to average
6 percent, consistent with previous staff analysis. This is slightly higher than the average return (5.3 percent)
since the CTF inception in 2004, which reflects the impact of unusually dismal earnings during the Global
Financial Crisis.
Under the baseline scenario, investment returns from the trust funds in FY2024 (18 percent of GDP) will not be
sufficient to cover the reduction in grants. While fiscal consolidation efforts by the state governments under
the Long Term Fiscal Frameworks (LTFF) help constrain the expenditures, the fiscal balance of the general
government will turn into a deficit of 1 percent of GDP in FY2024. The baseline assumes that the fiscal
consolidation efforts are extended to the national government. This will result in smaller deficit in later years,
resulting in a balanced budget in FY2034. Nominal amount of annual draw-downs from the trust funds will
remain the same as in FY2024 ($70 million) – however, due to modest inflation, its real value as measured
1
The CTF was created to contribute to the long-term budgetary self-reliance of the FSM and provide the FSM government
with an ongoing source of revenue after FY2023. The amended Compacts and their subsidiary agreements contain no
commitments, either express or implied, regarding the level of the revenue that will be generated by the trust fund, nor is
there any commitment regarding the degree to which the revenue will contribute to the long-term budgetary self-reliance
of the FSM.

Box 2. Micronesia: Long-term Outlook on Trust Funds (concluded)

in percent of GDP will gradually decline (from 18 percent of GDP in FY2024 to 14 percent of GDP in FY2034).
The real value of the trust funds balance will also decline (from 300 percent of GDP in FY2024 to 240 percent of
GDP in FY2034), while their nominal amount will remain the same. In the meantime, the financing gap is
assumed to be covered by additional borrowing on concessional terms to maintain priority spending in public
infrastructure and social services with high development impact.
Policy Action Scenario
Under the policy action scenario, the authorities are assumed to undertake reforms to enhance economic
growth and consolidate the fiscal balance. Medium-term growth rate rises by 1 percent per year from the
baseline (from 0.6 to 1.6 percent). The tax reform package is implemented gradually between FY2016
and 2019, resulting in an increase of tax revenue by 4 percent of GDP in FY2019 and onwards. In addition to
the fiscal consolidation efforts by the state governments under the LTFF, the policy action scenario assumes
expenditure contraction by 1 percent of GDP. The entire fiscal surplus is transferred to the trust funds.
The trust funds balance will reach close to 340 percent of GDP in FY2023, generating sufficient investment
returns to avoid fiscal deficit from FY2024 2. With the view to keeping essential services of the Government, this
scenario assumes that draw-downs from the trust funds are adjusted annually by the inflation rate (about
2 percent per year). The balance of the trust funds will remain above 300 percent throughout the projection
period while the public debt will remain on a sustainable path on account of stronger fiscal balance and
accelerated growth (see the DSA Appendix). This shows again the critical importance for the authorities to
achieve a national consensus in a loosely federated nation – the key to implement policy actions contained in
the 2023 Action Plan, in particular, growth-enhancing structural reforms and the long-debated tax reform
package.
Micronesia: Trust Funds Asset Value Micronesia: Trust Funds Asset Nominal Balance
(Percent of GDP) Baseline Scenario Policy Action Scenario (US Million Dollars) Baseline Scenario Policy Action Scenario
400% 2,000
350% 1,800
1,600
300%
1,400
250% 1,200
200% 1,000
800
150%
600
100%
400
50% 200
0% 0
2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
Sources: FSM authorities and Fund staff estimates. Sources: FSM authorities and Fund staff estimates.
2
If the assumed investment return drops from 6 to 5 percent, the trust funds balance in FY2023 will decline to about 310
percent of GDP. Lifting the trust funds value back to about 340 percent of GDP in FY2023 will require additional fiscal
consolidation of 3 percent of GDP per year compared to the Policy Action Scenario. Generating the same amount of return
in FY2024 as in the Policy Action Plan will require additional fiscal consolidation of 10 percent of GDP per year compared to
the Policy Action Scenario (trust funds value in FY2023 will reach 400 percent of GDP).

Box 3. Micronesia: Fisheries Sector in the FSM Economy

Context. Micronesian seas are rich in fish resources, in particular, skipjack, yellowfin, and bigeye tuna. FSM’s
Exclusive Economic Zone (EEZ) covers an area of about 3 million square kilometers, close to the size of India.
Fisheries sector is one of the pillars underpinning the economic growth strategy under the 2023 Action Plan.
While employment in the sector is relatively small (2 percent of the total employment), fish export has been
growing on account of rising international price of tuna and dominates Micronesia’s exports (more than
85 percent of total exports of goods if excluding re-exports of petroleum products for foreign aircrafts re-
fuelling at Micronesia’s airports).
Subsectors. Fisheries in Micronesia can be categorized in 3 subsectors: i) subsistence fishery (mostly for
home consumption and employment is informal); ii) locally-based commercial fishery (coastal and offshore);
and iii) foreign-based offshore fishery. While the first two subsectors contribute directly to the GDP of the
FSM (about 10 percent of GDP in total), the third subsector (foreign-based offshore fishery) contributes to
the economy by way of paying fishing license fees to the National government.
Locally-based commercial fishery. Five fishing companies are incorporated in the FSM: two are relatively
small and domestically-owned (wholly and minority- Micronesia: Employment in Fishing Industry
partially owned by state governments), two joint (In percent of total employment)
2.5
ventures (each 75 percent owned by Japanese
companies), and one Chinese flagged company based 2.0
in the FSM. Efforts to build locally-owned fishing

1.5
industry have so far been disappointing on account
mostly of lack of knowledge on international fish 1.0
markets and low managerial capacities. Requirements

0.5
for large upfront capital investment have also been an
obstacle. Currently, the contribution to the 0.0
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
development of the private sector and employment
remains low, with formal employment in the fishing
sector at less than 2 percent of total employment.
Foreign-based offshore fishery. Foreign-based vessels fishing in the Micronesian EEZ, mostly from China,
Japan, South Korea, Taiwan, Province of China, and the U.S, pay fishing license fees to the national
government. The fees are determined under the provisions in the Nauru Agreement1, a regional agreement
that introduced in 2012 minimum benchmark fees for foreign fishing companies operating in the region.
Under this system, fishing companies pay a flat fee per vessel per day with adjustment for the size of the
vessel (VDS: Vessels Day Scheme). Minimum benchmark fees under the vessel day scheme (VDS) rose from
$5,000 a day in FY2012 to $6,000 in FY2014 and most recently to $8,000 in FY2015 – a sign that the regional
agreement has enhanced the bargaining powers of the signatory countries. While fishing license fee revenue
has so far been increasing in tandem with the upward revision of the benchmark fees under the VDS,
uncertainties loom ahead as the recent plunge in the price of tuna (from the peak of $2,520 per ton in the
third quarter of 2012 to $1,670 per ton in the fourth quarter of 2014) has started to have some impacts
1
“Nauru Agreement Concerning Cooperation in the Management of Fisheries of Common Interest” is a regional
agreement between 8 signatories (PNA: Parties to the Nauru Agreement): FSM, Kiribati, Marshal Islands, Nauru, Palau,
Papua New Guinea, Solomon Islands and Tuvalu.

Box 3. Micronesia: Fisheries Sector in the FSM Economy (concluded)

on foreign fishing companies that send their vessels to the EEZ of Micronesia. Also, changes in the climate,
including the El Niño cycle, could affect fish movement in the Pacific. In FY2014, revenue from the fishing
license fees was $47 million (15 percent of GDP), accounting for 22 percent of the general government
revenue. Authorities assume that the fishing license fee revenue will remain at the same level in the coming
years.
Future prospects. While the authorities see potentials in the fishery sector, they recognize the difficulty in
building their own fishing industry as opposed to foreign fishing companies that are better connected to the
international tuna markets with well-equipped vessels. In this context, they are pursuing to obtain more
value added from foreign vessels operating in the region rather than making more investment in domestic
fishing companies: more transshipment of fish and vessel servicing at Micronesian ports. The planned ADB-
financed Pohnpei Port development project that envisages expanding the wharf to cater to larger and more
vessels will play an important role in this respect. Also, the authorities are considering introducing lower fees
for those foreign fishing companies that make investment in the FSM for processing their fish catches in the
Micronesian EEZ.
Micronesia: Fishing License Fees Price of Tuna¹

(U.S. dollars per ton)
50 25
45 2,500
40 20
35
Percent
2,000
USD mn
30 15
25
20 10 1,500
15
10 5 1,000
5
0 0 500
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014 Est.
0
1990Q1
1994Q1
1998Q1
2002Q1
2006Q1
2010Q1
2014Q1
In USD million (LHS)
In percent of GDP (RHS) 1/ Four-quarter moving average.
In percent of General Government Revenue (RHS) Sources: Globe Fish, Ministry of Trade of Thailand; and IMF staff estimates.

Figure 1. Micronesia: Economic Developments

Micronesia’s growth has been disappointing, as the While growth in the fisheries sector has improved in
delay in structural reforms holds back private sector FY2014, the construction sector continues to be
development... sluggish.
Real GDP Growth Contribution to Growth
(Year-on-year percent change) (As share to real GDP)
5 6
FY2000-14 Average
3 4
1 2
-1 0
Fisheries
-3 -2
Construction and repairs
Wholesale and retail trade
-4 Public administration
-5
Education
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 Est. Other

-6
2010 2011 2012 2013 2014 Est.
Fiscal balance has recently turned into surplus, on Inflation has eased since 2013s.
the back of increasing fishing license fee revenue.
Fiscal Balance 1/ CPI Inflation
(In percent of GDP) (Year-on-year percent change)
80 16 14 14
12 12
US
40 8 10 FSM 10
8 8
0 0 6 6
Grants (LHS)
4 4
Domestic Revenue (LHS)
-40 Fiscal Balance (RHS) -8 2 2
Fiscal expenditure (LHS)
0 0
-80 -16
-2 -2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 Est.
-4 -4
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
The current account has mostly been in deficit, but Public sector, including public enterprises, accounts
financed largely by capital grants from donors. for over half of the total employment.
Balance of Payments Employment Employment by Sector, FY2013
(In thousands of workers)
(In percent of GDP)
9
60 Wholesale,
Public
20%
Admin.,
42%
40
6
20
0 Private Sector 1/
3 General Government 2/
-20
Public Enterprise
-40 Constructi
on, 8%
Other,
-60 0
12%
Trade, Services & Income Unrequited Transfers Current Account 2000 2002 2004 2006 2008 2010 2012
Transport, Fisheries,
-80 1/ Does not include subsistence sector employment.
6% Education, Hotels, 4% 2%
2/ National, state and local governments.
6%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 Est.

Figure 2. Micronesia: Regional Comparison of Recent Developments

Micronesia’s economy is stagnating and fares worse than While inflation moderated in 2014 on the back of falling oil
the other Pacific Island Countries (PICs)… prices…
Real GDP Growth CPI Inflation
(In percent) (In percent)
8 8
2013 2014 7
6
6 2013 2014
4 5
2 4
3
0
2
-2 1
0
-4
-1
-6 -2
Tonga
FSM
Samoa
Vanuatu
RMI
Fiji
Kiribati
Samoa
PNG
Tonga
Palau
Solomon Is.
RMI
Fiji
Kiribati
FSM
PNG
Solomon Is.
Vanuatu
Palau
And the current account deficit improved in 2014, thanks to FSM had a large fiscal surplus in 2014, on the back of
increasing fishing license fees and a tax windfall from a increasing fishing license fees and a tax windfall from a
company’s sale of shares launched on a foreign stock company’s sale of shares launched on a foreign stock
exchange. exchange.
Current Account Balance General Government Overall Balance
(In percent of GDP) (In percent of GDP)
10 15
10 2013 2014
0
5
-10
0
-20 -5
-30 2013 2014 -10

-15
-40
-20
-50
-25
-60 -30
Tonga
FSM
Vanuatu
Samoa
RMI
Fiji
Kiribati
PNG
Solomon Is.
Palau
Samoa
Fiji
RMI
Tonga
Kiribati
FSM
Solomon Is.
PNG
Vanuatu
Palau
Exports have been stable in the last few years, as tuna price While the real effective exchange rate (REER) has
in the international market has been weakening... somewhat appreciated recently, as in a number of PICs.
Total Export of Goods Real Effective Exchange Rates (REER)
(In percent of GDP) (Index, 2003 = 100)
35 35 160 160
Kiribati RMI Kiribati RMI
30 30 150 150
FSM Palau FSM Palau
140 140
25 25
Samoa Tonga Samoa Tonga
130 130
20 20
120 120
15 15
110 110
10 10
100 100
5 5 90 90
0 0 80 80
2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014
Source: FSM authorities and Fund staff calculations.

Table 1. Micronesia: Selected Economic Indicators, FY2010–15 1/
Nominal GDP (FY2013): US$315 million

Population (FY2013): 103,679
GDP per capita (FY2013): US$3,034
IMF Quota: SDR 5.1 million
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
Est. Proj.
Real sector (annual percent change)
Real GDP 3.2 1.8 0.1 -4.0 0.1 0.3
Consumer prices 3.7 4.3 6.3 2.1 0.7 -1.0
Employment 3.9 1.7 -2.6 -2.0 0.0 0.1
Public (incl. public enterprises) 1.1 -0.4 -0.8 -0.7 0.0 0.0
Private 7.1 3.8 -4.8 -3.9 0.1 0.2
Nominal wages 2.7 0.4 3.8 1.6 1.8 1.9
public average wage/private average wage 2.2 2.1 2.0 2.0 2.0 2.0
Consolidated government finance (in percent of GDP)
Revenue and grants 68.2 65.0 66.0 62.3 68.6 61.9
Revenue 21.6 20.8 22.9 26.8 37.4 30.9
Grants 2/ 46.6 44.3 43.1 35.5 31.2 31.0
Expenditure 67.8 65.6 65.3 59.6 56.1 59.0
Current 46.9 45.6 44.2 45.9 46.0 45.5
Capital 20.8 20.0 21.1 13.7 10.1 13.6
Overall balance 0.5 -0.6 0.8 2.8 12.5 2.8
Overall balance (exc. Grants) -46.1 -44.8 -42.4 -32.8 -18.7 -28.2
Commercial banks (in percentage of GDP; end of period)

Loans 19.0 17.9 17.4 17.2 18.0 …
Deposits 52.5 53.8 62.7 67.8 75.4 …
Interest rates (in percent, average for FY)
Consumer loans 14.9 14.4 14.2 15.7 15.7 …
Commercial loans 6.6 6.6 6.4 6.4 6.4 …
Balance of payments (in millions of U.S. dollars)
Trade balance -128.4 -134.0 -125.7 -131.1 -129.2 -119.1
Net services and income -29.8 -32.5 -25.8 -11.7 5.5 5.6
Private and official transfers 113.8 111.2 110.3 111.1 131.7 111.4
Current account -44.4 -55.3 -41.2 -31.6 8.0 -2.1
(in percent of GDP) -15.1 -17.9 -12.6 -10.1 2.5 -0.7
Current account excluding official transfers -153.4 -158.9 -142.5 -129.6 -89.6 -99.4
(in percent of GDP) -52.2 -51.4 -43.7 -41.2 -28.5 -31.5
External debt (in millions of U.S. dollars; end of period) 3/
Stock 86.4 89.8 90.3 85.2 83.0 83.7
(in percent of GDP) 29.4 29.1 27.7 27.1 26.4 26.5
Debt service 4.4 5.0 5.1 5.9 7.1 7.0
(in percent of exports of goods and services) 6.3 6.7 5.3 6.7 7.9 8.0
Exchange rate regime U.S. dollar is the official currency
Real effective exchange rate 4/ 109.9 109.5 112.4 115.1 115.8 n.a.
Sources: FSM authorities and IMF staff estimates.

1/ Fiscal year ending September 30.
2/ Excludes grants to the Compact Trust Fund.
3/ Government and public enterprise debt only.
4/ Calendar year. 2003=100.

Table 2. Micronesia: General Government Operations, FY2010–20 1/
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Est. Projections
(In millions of U.S. dollars)
Revenue 200.3 201.0 215.2 196.1 215.9 195.3 193.7 197.6 201.1 204.9 209.0
Tax revenue 35.6 37.3 38.0 38.2 61.5 41.0 41.3 42.5 43.4 44.6 45.7
Wage and salary tax 7.6 7.6 7.7 7.9 7.9 7.9 8.0 8.2 8.4 8.6 8.8
Gross revenue tax 16.8 17.6 18.1 17.2 17.2 17.3 17.4 17.9 18.3 18.8 19.3
Corporate Tax 0.8 2.1 2.6 4.4 27.6 7.6 7.7 7.9 8.1 8.3 8.5
Import taxes 10.0 9.8 9.4 8.5 8.5 7.9 8.0 8.2 8.4 8.6 8.8
Other taxes 0.3 0.3 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3
Grants (from abroad) 2/ 136.7 136.8 140.6 111.7 98.1 97.9 95.3 96.6 97.8 98.8 100.3
Current 86.1 84.0 82.0 80.4 80.0 79.7 79.3 79.1 78.9 78.7 78.5
Compact general 66.1 66.9 65.2 63.8 63.8 63.9 64.0 64.2 64.4 64.6 64.7
Capital 50.7 52.8 58.6 31.3 18.1 18.2 16.0 17.4 18.9 20.1 21.8
Non-tax revenue 28.0 26.8 36.6 46.1 56.3 56.5 57.0 58.6 59.9 61.5 63.0
Fishing license fees 17.7 18.8 26.4 35.0 46.9 47.0 47.5 48.8 49.9 51.2 52.4
Expenditure 198.9 202.8 212.7 187.4 176.6 186.4 185.2 187.8 190.3 195.3 201.1
Expense 137.8 141.1 144.1 144.3 144.9 143.5 144.8 147.2 149.7 152.5 155.3
Goods and services 131.2 133.6 137.2 138.3 138.9 137.5 138.8 141.0 143.4 146.1 148.8
Wages and salaries 68.0 68.0 68.3 69.5 70.0 69.3 70.6 72.0 73.5 75.0 76.5
Travel 10.4 10.1 9.5 8.8 9.7 9.7 9.7 9.7 9.7 9.7 0.1
Other 52.8 55.6 59.4 60.0 59.1 58.4 58.5 59.3 60.1 61.4 72.2
Interest payments 0.8 1.0 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2
Subsidies 1.0 0.7 1.0 0.6 0.6 0.6 0.7 0.7 0.7 0.7 0.7
Net transfers 4.8 5.8 4.8 4.2 4.2 4.2 4.2 4.3 4.4 4.5 4.7
Net acquisition of nonfinancial assets 61.1 61.7 68.6 43.1 31.7 42.9 40.5 40.5 40.6 42.7 45.8
Gross operating balance 62.5 59.9 71.1 51.7 71.1 51.9 48.9 50.4 51.5 52.4 53.7
Net lending/borrowing 1.4 -1.8 2.5 8.7 39.4 8.9 8.5 9.8 10.9 9.6 7.9
(In percent of GDP)
Revenue 68.2 65.0 66.0 62.3 68.6 61.9 60.8 60.4 60.1 59.6 59.4
Tax revenue 12.1 12.1 11.6 12.2 19.5 13.0 13.0 13.0 13.0 13.0 13.0
Grants (from abroad) 2/ 46.6 44.3 43.1 35.5 31.2 31.0 29.9 29.5 29.2 28.8 28.5
Non-tax revenue 9.5 8.7 11.2 14.7 17.9 17.9 17.9 17.9 17.9 17.9 17.9
Expenditure 67.8 65.6 65.3 59.6 56.1 59.0 58.1 57.4 56.8 56.8 57.1
Expense 46.9 45.6 44.2 45.9 46.0 45.5 45.4 45.0 44.7 44.4 44.1
Net acquisition of nonfinancial assets 20.8 20.0 21.1 13.7 10.1 13.6 12.7 12.4 12.1 12.4 13.0
Gross operating balance 21.3 19.4 21.8 16.4 22.6 16.4 15.3 15.4 15.4 15.2 15.2
Net lending/borrowing 0.5 -0.6 0.8 2.8 12.5 2.8 2.7 3.0 3.2 2.8 2.2
Balance of trust funds (CTF and FSMTF) 71.7 71.7 82.5 107.0 131.5 157.8 175.9 192.0 210.0 227.6 246.3
Memorandum items:
GDP in nominal prices 293.6 309.1 325.9 314.6 314.8 315.7 318.7 327.4 334.7 343.6 352.0
1/ Fiscal year ending September. The consolidated fiscal accounts cover the national and four state governments.
2/ Excludes grants for the Compact Trust Fund.

Table 3. Micronesia: Indicators of Financial and External Vulnerability, FY2010–20
22

INTERNATIONAL MONETARY FUND
Projections
Commercial banks
Deposits (in percent of GDP) 52.5 53.8 62.7 67.8 75.4 … … … … … …
Deposits (Year-on-year percent change) 16.3 7.8 22.9 4.3 11.3 … … … … … …
Loans (in percent of GDP) 19.0 17.9 17.4 17.2 18.0 … … … … … …
Loans (Year-on-year percent change) 19.3 -0.9 2.9 -4.8 4.6 … … … … … …
Loan to deposit ratio (in percent) 36.1 33.2 27.8 25.3 23.8 … … … … … …
Foreign assets (in percent of GDP) 45.6 46.4 55.2 61.6 69.3 … … … … … …
Equity capital (in percent of total asset) 9.4 9.1 7.8 7.6 7.2 … … … … … …
Loss allowance (in percent of total loans) 1/ 3.7 4.5 3.7 3.6 3.2 … … … … … …
Noncurrent loan (in percent of total loans) 1/ 3.0 5.6 5.3 4.4 3.5 … … … … … …
FSM Development Bank
Loans (in percent of GDP) 9.2 7.8 7.1 7.8 7.1 … … v … … v … …
External indicators 2/
Exports (goods & services, y/y percent change) 13.8 8.3 27.0 -7.7 2.4 -3.0 1.5 2.7 2.3 2.4 1.8
Imports (goods & services, y/y percent change) 0.2 5.8 4.3 -1.9 0.0 -4.9 1.0 2.7 2.2 2.7 2.4
Current account balance (percent of GDP)
Including official transfers -15.1 -17.9 -12.6 -10.1 2.5 -0.7 -0.8 -1.5 -2.0 -2.7 -3.4
Excluding official transfers -52.2 -51.4 -43.7 -41.2 -28.5 -31.5 -31.3 -31.2 -31.2 -31.2 -31.3
Total external debt 3/
In millions of U.S. dollars 86.4 89.8 90.3 85.2 83.0 83.7 85.1 83.7 91.3 99.0 106.4
In percent of exports of goods and services 124.2 119.2 94.3 96.4 91.8 95.4 95.5 91.5 97.5 103.2 109.1
In percent of GDP 29.4 29.1 27.7 27.1 26.4 26.5 26.7 25.6 27.3 28.8 30.2
Debt service
In millions of U.S. dollars 4.4 5.0 5.1 5.9 7.1 7.0 6.3 5.9 5.8 5.7 5.9
In percent of exports of goods and services 6.3 6.7 5.3 6.7 7.9 8.0 7.1 6.4 6.2 5.9 6.0
In percent of GDP 1.5 1.6 1.6 1.9 2.3 2.2 2.0 1.8 1.7 1.7 1.7

1/ Domestic bank. Data for FY2014 are as of December 31, 2014.
2/ Data for FY2014 are estimate.
3/ Most of the debt is concessional and to official lenders, of which about 2/3 is to the Asian Development Bank.
Table 4. Micronesia: Deposit Money Banks, FY2010–14
FY2010 FY2011 FY2012 FY2013 FY2014

Assets and liabilities
Assets 178.4 190.1 228.1 237.7 262.9
Foreign assets 1/ 133.9 143.5 179.8 193.8 218.0
Claims on private sector 31.9 35.2 38.0 34.9 37.3
Consumer loans 21.7 22.2 25.3 24.6 …
Claims on the public sector 4.8 3.7 2.6 1.5 0.1
Others assets 7.4 7.7 7.7 7.5 7.5
Liabilities 178.4 190.1 228.1 237.7 262.9
Deposits 154.1 166.2 204.3 213.2 237.3
Central government deposits 29.0 37.2 62.1 63.7 34.0
Capital accounts 16.8 17.3 17.7 18.0 18.9
Other liabilities 7.5 6.5 6.0 6.5 6.8
Memorandum items
Loan/deposit ratio (in percent) 36.1 33.2 27.8 25.3 23.8
Deposits (percent change) 16.3 7.8 22.9 4.3 11.3
Loans (percent change) 19.3 -0.9 2.9 -4.8 4.6
Consumer loans (in percent of total loans)
Interest rates (percent) 2/
Deposit rates
Savings deposits 3/ 1.4 1.2 1.0 0.9 0.6
CDs 1.3 0.9 0.6 0.4 0.4
Time Deposits 0.8 1.0 0.8 0.7 0.8
Loans rates 4/
Consumer loans 14.9 14.4 14.2 15.7 15.7
Commercial loans 6.6 6.6 6.4 6.4 6.4

1/ Includes loans to abroad.
2/ Calendar year average
3/ Average rates offered by the deposit money banks
4/ Average rates charged by the deposit money banks

Table 5. Micronesia: Balance of Payments, FY2010–20
Est. Projections

Current Account Balance -44.4 -55.3 -41.2 -31.6 8.0 -2.1 -2.6 -4.9 -6.7 -9.2 -12.0
Trade balance -128.4 -134.0 -125.7 -131.1 -129.2 -119.1 -119.8 -123.1 -125.8 -129.3 -133.1
Exports, f.o.b. 31.6 40.4 57.6 47.8 49.9 47.1 48.0 49.3 50.5 51.6 52.3
Imports, f.o.b. -160.0 -174.4 -183.2 -178.9 -179.0 -166.2 -167.8 -172.4 -176.3 -181.0 -185.4
Petroleum products -39.2 -45.7 -57.8 -52.6 -52.6 -39.4 -39.8 -40.9 -41.8 -42.9 -44.0
Services account -40.8 -43.3 -42.1 -39.0 -39.0 -39.1 -39.4 -40.5 -41.4 -42.5 -43.6
Receipts 37.9 35.0 38.2 40.5 40.5 40.7 41.0 42.2 43.1 44.3 45.3
Travel 29.8 26.8 27.8 30.1 30.1 30.2 30.5 31.3 32.0 32.9 33.7
Payments -78.7 -78.3 -80.2 -79.6 -79.5 -79.7 -80.5 -82.7 -84.5 -86.8 -88.9
Freight and insurance -25.6 -28.4 -29.7 -27.8 -27.8 -27.9 -28.2 -28.9 -29.6 -30.4 -31.1
Transportation -15.6 -15.4 -17.2 -16.8 -16.8 -16.9 -17.0 -17.5 -17.9 -18.4 -18.8
Income, net 11.0 10.8 16.2 27.4 44.5 44.7 45.3 46.7 47.9 49.4 50.8
Receipts 23.5 23.7 31.4 39.9 55.2 55.4 55.8 57.1 58.3 59.6 60.9
Payments -12.5 -12.9 -15.2 -12.5 -10.8 -10.7 -10.6 -10.4 -10.4 -10.2 -10.1
Foreign workers earnings -2.6 -2.7 -3.1 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1
Unrequited transfers 113.8 111.2 110.3 111.1 131.7 111.4 111.4 112.0 112.6 113.3 113.9
Private 3.5 6.3 7.7 12.2 32.5 12.5 12.6 13.0 13.3 13.6 14.0
Inflows 1/ 18.8 22.0 24.1 28.2 48.6 28.6 28.9 29.7 30.4 31.2 31.9
Outflows 15.3 15.7 16.4 16.0 16.1 16.2 16.3 16.7 17.1 17.6 18.0
Official 109.0 103.6 101.3 98.0 97.6 97.3 97.1 97.4 97.6 97.9 98.2
Compact funds 66.1 66.9 65.2 63.8 63.8 63.9 64.0 64.2 64.4 64.6 64.7
Other 42.9 36.7 36.1 34.2 33.8 33.4 33.1 33.2 33.2 33.3 33.4
Capital Account Balance 85.7 84.4 91.6 66.6 65.7 67.1 69.9 72.7 75.6 78.2 81.4
Capital grants 64.2 62.0 68.3 42.2 40.1 40.2 41.6 43.1 44.6 45.7 47.5
CTF Grants 21.5 22.4 23.3 24.4 25.7 26.9 28.2 29.6 31.0 32.5 33.9
Financial Account Balance 41.4 30.5 57.7 40.2 73.7 65.0 62.4 65.4 69.0 69.5 69.5
Direct Investment (net) -0.8 -0.8 -1.0 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.9
Portfolio investment (net) 30.0 22.2 24.3 28.0 65.2 36.0 36.8 39.3 41.7 41.5 41.2
of which: Contributions to CTF 21.5 22.4 23.3 24.4 25.7 26.9 28.2 29.6 31.0 32.5 33.9
Other investment (net) 12.2 9.1 34.5 13.0 9.3 29.8 26.5 26.9 28.1 28.9 29.1
Memorandum items (In percent of GDP)
Current account balance -15.1 -17.9 -12.6 -10.1 2.5 -0.7 -0.8 -1.5 -2.0 -2.7 -3.4
Trade balance -43.7 -43.4 -38.6 -41.7 -41.0 -37.7 -37.6 -37.6 -37.6 -37.6 -37.8
Exports 10.8 13.1 17.7 15.2 15.8 14.9 15.1 15.1 15.1 15.0 14.8
Imports -54.5 -56.4 -56.2 -56.9 -56.9 -52.7 -52.7 -52.7 -52.7 -52.7 -52.7
Service -13.9 -14.0 -12.9 -12.4 -12.4 -12.4 -12.4 -12.4 -12.4 -12.4 -12.4
Income (net) 3.7 3.5 5.0 8.7 14.1 14.2 14.2 14.3 14.3 14.4 14.4
Receipts 8.0 7.7 9.6 12.7 17.5 17.5 17.5 17.5 17.4 17.3 17.3
Payments 4.3 4.2 4.7 4.0 3.4 3.4 3.3 3.2 3.1 3.0 2.9
Transfers 38.8 36.0 33.9 35.3 41.8 35.3 35.0 34.2 33.6 33.0 32.4
Private 1/ 1.2 2.0 2.4 3.9 10.3 4.0 4.0 4.0 4.0 4.0 4.0
Official 37.1 33.5 31.1 31.1 31.0 30.8 30.5 29.7 29.2 28.5 27.9
Capital account balance 29.2 27.3 28.1 21.2 20.9 21.3 21.9 22.2 22.6 22.8 23.1
Capital grants 21.9 20.1 21.0 13.4 12.7 12.7 13.1 13.2 13.3 13.3 13.5
CTF grants 7.3 7.2 7.1 7.8 8.1 8.5 8.9 9.0 9.3 9.4 9.6
Financial account balance 14.1 9.9 17.7 12.8 23.4 20.6 19.6 20.0 20.6 20.2 19.7
Direct investment (net) -0.3 -0.3 -0.3 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Portfolio investment (net) 10.2 7.2 7.5 8.9 20.7 11.4 11.5 12.0 12.5 12.1 11.7
of which: Contributions to CTF 7.3 7.2 7.1 7.8 8.1 8.5 8.9 9.0 9.3 9.4 9.6
1/ Includes household remittance and corporate tax on income from abroad.

Table 6. Micronesia: Medium-Term Scenario, FY2013–25
FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025
Est. Projections
Real sector
Real GDP (percent change) -4.0 0.1 0.3 1.0 0.9 0.9 0.8 0.7 0.6 0.6 0.6 0.6 0.6
Consumer prices (percent change) 2.1 0.7 -1.0 1.9 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0
General government finance (in percent of GDP)

Revenue and grants 62.3 68.6 61.9 60.8 60.4 60.1 59.6 59.4 58.7 58.1 57.4 53.5 53.0
Total domestic revenue 26.8 37.4 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 49.0 48.6
of which fishing license fees 11.1 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9
Grants 1/ 35.5 31.2 31.0 29.9 29.5 29.2 28.8 28.5 27.8 27.2 26.6 4.5 4.4
Expenditure 59.6 56.1 59.0 58.1 57.4 56.8 56.8 57.1 56.6 56.0 55.4 54.6 53.7
Current 45.9 46.0 45.5 45.4 45.0 44.7 44.4 44.1 43.7 43.3 42.9 42.3 41.7
Capital 13.7 10.1 13.6 12.7 12.4 12.1 12.4 13.0 12.8 12.7 12.5 12.3 12.0
Overall balance 2.8 12.5 2.8 2.7 3.0 3.2 2.8 2.2 2.2 2.1 2.0 -1.0 -0.7
Balance of trust funds (CTF and FSM TF) 336.5 414.0 498.2 560.6 628.7 702.9 782.3 867.2 958.5 1056.9 1168.5 1168.5 1168.5
(In percent of GDP) 107.0 131.5 157.8 175.9 192.0 210.0 227.6 246.3 266.1 286.8 310.0 303.0 296.2
Trade balance -131.1 -129.2 -119.1 -119.8 -123.1 -125.8 -129.3 -133.1 -136.8 -140.5 -144.4 -147.8 -151.3
Net services -39.0 -39.0 -39.1 -39.4 -40.5 -41.4 -42.5 -43.6 -44.6 -45.6 -46.7 -47.4 -48.2
Net income 27.4 44.5 44.7 45.3 46.7 47.9 49.4 50.8 52.1 53.5 54.9 126.5 128.0
Private and official transfers 111.1 131.7 111.4 111.4 112.0 112.6 113.3 113.9 114.6 115.2 115.9 54.9 55.6
Current account -31.6 8.0 -2.1 -2.6 -4.9 -6.7 -9.2 -12.0 -14.7 -17.4 -20.2 -13.8 -16.0
(In percent of GDP) -10.1 2.5 -0.7 -0.8 -1.5 -2.0 -2.7 -3.4 -4.1 -4.7 -5.4 -3.6 -4.0
INTERNATIONAL MONETARY FUND
Current account excluding official transfers -129.6 -89.6 -99.4 -99.7 -102.3 -104.3 -107.1 -110.1 -113.1 -116.1 -119.2 -51.4 -53.8
(In percent of GDP) -41.2 -28.5 -31.5 -31.3 -31.2 -31.2 -31.2 -31.3 -31.4 -31.5 -31.6 -13.3 -13.6

External debt (in millions of US$; end of period) 2/
Stock 85.2 83.0 83.7 85.1 83.7 91.3 99.0 106.4 113.9 121.1 128.1 138.8 148.4
(in percent of GDP) 27.1 26.4 26.5 26.7 25.6 27.3 28.8 30.2 31.6 32.9 34.0 36.0 37.6
Debt service 5.9 7.1 7.0 6.3 5.9 5.8 5.7 5.9 5.9 6.0 6.2 6.2 6.2
(in percent of exports of goods and services) 6.7 7.9 8.0 7.1 6.4 6.2 5.9 6.0 5.9 6.0 6.0 5.9 5.8

1/ Excludes contributions to the Compact Trust Fund.
2/ Government and public enterprise debts only.
25
Table 7. Micronesia: Millennium Development Goals (MDGs) Indicators
1990 2000 2004 2007 2011 2012 2013

Goal 1: Eradicate extreme proverty and hunger
Poorest quintile's share in national income or consumption, percentage … 1.6 … … … … …
Poverty headcount ratio at $1.25 a day (PPP) (% of population) … 44.7 … … … … …
Goal 2: Achieve universal primary education

Net enrolment ratio in primary education … … … … … … …
Proportion of pupils starting grade 1 who reach last grade of primary … … … … … … …
Goal 3: Promote gender equality and empower women

Ratio of girls to boys in primary, secondary and tertiary education
Gender Parity Index in primary level enrolment … … 0.98 1.01 … … …
Gender Parity Index in secondary level enrolment … … 1.06 … … … …
Gender Parity Index in tertiary level enrolment … … … … … … …
Share of women in wage employment in the non-agricultural sector … … … … … … …
Proportion of seats held by women in national parliament … 0 0 0 0 0 0
Goal 4: Reduce child mortality

Children under five mortality rate per 1,000 live births 55.4 53.1 48 44.1 38.9 37.6 36.4
Infant mortality rate (0-1 year) per 1,000 live births 43.2 41.6 38.1 35.4 31.6 30.7 29.8
Children 1 year old immunized against measles, percentage 81 85 85 92 92 91 91
Goal 5: Improve maternal health

Proportion of births attended by skilled health personnel, percentage … … … … … … …
Current contraceptive use among married women 15-49 years old, percentage … … 23.0 … … … …
Adolescent birth rate, per 1,000 women 50.4 38.5 30.7 25.4 19.9 18.6 …
Antenatal care coverage
At least one visit, percentage … … … … … … …
At least four visits, percentage … … … … … … …
Unmet need for family planning, percentage … … … … … … …
Goal 6: Combat HIV/AIDS, malaria and other diseases

Men 15-24 years old with comprehensive correct knowledge of HIV/AIDS, percentage … … … … … … …
Women 15-24 years old with comprehensive correct knowledge of HIV/AIDS, percentage … … … … … … …
Tuberculosis incidence rate per year per 100,000 population (mid-point) 379 279 247 226 200 194 …
Tuberculosis detection rate under DOTS, percentage (mid-point) 100 30 45 59 72 72 …
Tuberculosis treatment success rate under DOTS, percentage … 93 80 65 96 … …
Goal 7: Ensure environmental sustainability

Proportion of land area covered by forest, percentage … 91 91 92 92 92 …
Carbon dioxide emissions (CO2), thousand metric tons of CO2 (CDIAC) … 136 147 99 … … …
Carbon dioxide emissions (CO2), metric tons of CO2 per capita (CDIAC) … 1.3 1.4 0.9 … … …
Proportion of marine areas protected, percentage 0.09 0.38 0.06 0.06 … 99.99 …
Proportion of terrestrial areas protected, percentage 2.7 4.0 4.0 4.0 … 4.0 …
Proportion of the population using improved drinking water sources 91 90 90 90 89 89 …
Proportion of the population using improved sanitation facilities 19 34 41 47 55 57 …
Goal 8: Develop a global partnership for development

Net ODA received as a proportion of gross national income … 42 35 43 42 34 …
Fixed telephone lines per 100 inhabitants 2.5 9.0 11.3 8.3 8.1 8.1 9.7
Mobile cellular subscriptions per 100 inhabitants 0.0 0.0 12.0 26.1 26.7 30.2 30.3
Internet users per 100 inhabitants 0.0 3.7 11.0 13.6 22.8 26.0 27.8
Source: United Nations Millennium Development Goals Indicators 2014.

Appendix I. Micronesia: Staff Policy Advice from the 2012

Article IV Consultation
Staff Advice Policy Actions
Fiscal policy
Develop a credible long-term fiscal strategy and The authorities produced the “2023 Action
secure wide buy-in across the nation, to better Plan” that includes a number of policy actions
prepare for the post-2023 period. in the fiscal area, in particular, the
implementation of the tax reform package.
Most of them need to be underpinned by
legislative measures. The authorities are
launching a communication campaign across
the nation.
Undertake expenditure reforms. The state governments started implementing
the Long-Term Fiscal Frameworks (LTFF) in
FY2014.
Establish a Unified Revenue Authority (URA). The URA started its operations from January
2015, by unifying revenue offices of the
national and two state governments.
Private sector
Improve the business environment and The authorities plan to receive TA from the
promote inward foreign direct investment. World Bank Group to review all investment and
other relevant laws to identify areas of
discrepancies.
Financial sector
Strengthen the regulatory framework. The authorities are preparing a new Credit
Union Act that will expand the supervisory
mandate of the Banking Board over credit
unions, with TA from PFTAC and the Legal
Department of the Fund.
Statistical capacity
Improve the reliability, coverage, and timeliness TA from the Fund and PFTAC is building the
of economic statistics, particularly in statistical capacity of the authorities. From
government finance and balance of payments FY2013, fiscal data for budgetary central
statistics. government is produced following the
Government Finance Statistics Manual 2001
format. From FY2014, balance of payments and
international investment position statistics are
reported to the Fund.

Appendix II. Micronesia: Risk Assessment Matrix1

Overall Level of Concern
Likelihood (Over
Impact and Policy Response
next 1–3 years)
Global/external
 Sustained decline Medium Medium
in energy prices, A decline in oil prices would have a moderate positive impact on
triggered by
growth, while having somewhat larger impact on the current account
deceleration of
(FSM’s net oil import was 12 percent of GDP in FY2013, mostly used
global demand and
coming-on-stream for the generation of electricity and fuel for ships). In addition, it
of excess capacity would help lower the inflation rate.
(medium-term) Policy response: The government needs to prepare for a potential
rebound of oil prices, in particular by further investing in renewable
energy in outer islands where the cost of electricity production using
diesel generators tends to be high.
 Natural disasters Medium Medium
Between 1980 and Growth would slow as ongoing investment projects get delayed and
2014, the FSM had fishing activities are impaired. Infrastructure could be damaged.
5 incidents of Policy response: Disaster risk can be reduced by strengthening
disaster storms resilience, including through better training and infrastructure. The
with average FSM needs to follow through the agreements made at the 1 st Annual
damage of Disaster Risk Management Platform meeting held in June 2014.
$1.3 million per Under the U.S. Compact, the FSM has disaster assistance agreements
tropical cyclone2. that involve a significant role for the United States Agency for
International Development (USAID).
Domestic
 Slow progress in High Medium
structural and fiscal Declining reform A lack of timely progress in reforms (private sector development and
reforms
momentum and fiscal reforms) would increase medium-term fiscal sustainability
political will would risks, possibly resulting in an acceleration of outmigration.
lead to delay in Continued stagnation in the private sector growth would further
delivering the weaken the financial position of the pension scheme.
necessary growth Policy response: Continue the outreach campaign on the 2023 Action
and fiscal reforms Plan that includes a number of critically important actions plans,
including the tax reform package and growth-enhancing structural
reforms.
 Delays in Medium Medium
implementation of Short-term growth would be negatively affected.
infrastructure
projects, in Policy response: Improve the planning process, in particular by
particular at the enhancing coordination between the national and state
planning stage governments. Update the infrastructure development plan of 2004
with TA from AsDB.
1
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view
of IMF staff). The relative likelihood of risks listed is staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a
probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM
reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks
may interact and materialize jointly.
2
EM-DAT: The OFDA/CRED International Disaster Database, www.emdat.be – Université catholique de Louvain – Brussels - Belgium

FEDERATED STATES OF
MICRONESIA
STAFF REPORT FOR THE 2015 ARTICLE IV
April 24, 2015
CONSULTATION—INFORMATIONAL ANNEX
Prepared By Asia and Pacific Department

(In Consultation with other Departments)
CONTENTS
FUND RELATIONS ______________________________________________________________________ 2
BANK-FUND RELATIONSHIP __________________________________________________________ 3
RELATIONS WITH THE ASIAN DEVELOPMENT BANK (AsDB) ________________________ 5
RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE

(PFTAC)—COUNTRY STRATEGY 2015–17 _____________________________________________ 7
STATISTICAL ISSUES ___________________________________________________________________ 9

FUND RELATIONS
(As of March 31, 2015)
Membership Status: Joined June 24, 1993; accepted Article VIII.
General Resources Account: SDR Million Percent Quota

Quota 5.10 100.00
Fund holdings of currency 5.10 100.00
Reserve position in Fund 0.00 0.01
SDR Department: SDR Million Percent Allocation

Net cumulative allocation 4.81 100.00
Holdings 6.23 129.60
Outstanding Purchases and Loans: None.
Financial Arrangements: None.
Projected Obligations to Fund: None.
Exchange Rate Arrangement:

The U.S. dollar is legal tender and the official currency. The Federated States of Micronesia (FSM)
maintains an exchange system that is free of restrictions on international payments and transfers for
current and capital transactions.
Article IV Consultation:
The Federated States of Micronesia (FSM) is on the 24–month consultation cycle. The 2012 Article IV
consultation discussions took place during November 9–19, 2012. The Executive Board discussed the
staff report (Country Report No. 13/16) and concluded the consultation on January 14, 2013.
Technical Assistance, 1999–2014:

STA, MCM, LEG, and PFTAC have provided technical assistance on statistics, banking supervision, tax
policy and administration, and combating of financial crime and financial system abuse.
Resident Representative: The Regional Resident Representative Office for Pacific Island Countries
based in Suva, Fiji was opened on September 13, 2010 and the office covers Fiji, Kiribati, Marshall
Islands, Micronesia, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
Mr. Tubagus Feridhanusetyawan is the current resident representative.

BANK-FUND RELATIONSHIP
The Bank and the Fund country teams maintain a close working relationship and have an
ongoing dialogue on a range of macroeconomic and structural issues. The teams agreed that
FSM’s main macroeconomic challenges are to prepare better for the expiration in FY2023 of the
Compact support from the US. To achieve this goal, the FSM needs to continue prudent fiscal policy
on both the expenditure and revenue sides and to enhance private sector development by further
improving the business environment. Based on this shared assessment, the teams identified the
following structural reform areas as macro-critical, in view of their central role in achieving long-term
budgetary self-reliance and sustained growth:
(i) Tax reform. FSM has been working on a comprehensive tax reform package to generate
additional revenue while enhancing the efficiency of tax administrations. The Fund,
principally through the Pacific Financial Technical Assistance Center (PFTAC), is providing TA
in this area, in collaboration with other donors.
(ii) Investment climate. Micronesia’s investment climate remains difficult, hindering the private
sector to become an engine of growth. World Bank Group is providing TA in this area, in
cooperation with other donors.
The teams agreed to continue the close cooperation going forward. Appendix I details the
specific activities planned by the two country teams in the coming year along with their expected
deliveries.

Appendix I. Micronesia: Bank and Fund Planned Activities in Macro-Critical Structural

Reform Areas
Title Products Provisional Timing Expected Delivery
of Missions Date (tentative)
A. Mutual information on relevant work programs
Bank work Public Expenditure Review May 2015 June 2015 – June 2016
program Investment Climate TA April 2015 Late 2015
IMF work 2015 Article IV Mission March 2015 May 2015

program
B. Request for work program inputs
Fund request Assessment of macroeconomic Semi-annual Ongoing

to Bank developments and policies
Information sharing Semi-annual Ongoing
Bank request Assessment of macroeconomic Semi-annual Ongoing

to Fund developments and policies
Information and macro data Semi-annual Ongoing

sharing
C. Agreement on joint point products and missions
Joint Work Joint Bank-Fund DSA March 2015 May 2015

Program

RELATIONS WITH THE ASIAN DEVELOPMENT BANK

(AsDB)
The AsDB has been working with the Federated States of Micronesia (FSM) since 1990, providing ten
loans1 totaling $84.2 million and 47 technical assistance projects worth $27.2 million. AsDB has
historically supported good governance, with a focus on economic management and accountability,
while also promoting development of the country’s social and private sectors.
Among the priorities in the FSM’s the Medium-term Development Framework (the Framework),
released at the Development Partners’ Forum in 2012, the AsDB’s latest Country Operations Business
Plan (COBP) for 2015–17 puts operational priorities in its support for: (i) developing key growth
drivers; (ii) providing efficient and sustainable infrastructure; and (iii) establishing better public sector
management. AsDB will focus on support for developing a sustainable tourism with continued
support for improving investment and business environments. In infrastructure, AsDB continues to
intervene in investments in water and sanitation, port development, renewable energy, and
improvement of efficiency of the existing power infrastructure. Supports for preparing and
implementing the Action Plan 2023 and public administration reforms are priorities in technical
assistance and policy dialogues.
Key lending pipelines included in the COBP for 2015–17 are: (i) the Pohnpei Port Development
Project; (ii) the Pohnpei Energy Sector Project; and (iii) the Leveraging the Economic Growth Potential
of Sustainable Tourism Project. Ongoing technical assistance provide support for the preparation of
the Action Plan 2023, update of the Infrastructure Investment Plan, preparation of sustainable
tourism plans, and public administration reforms at the national government, AsDB plans to support
public administration reforms at the state levels.
Currently there are two active loans. The Omnibus Infrastructure Development Project loans (totaling
$19m), approved in 2004, addresses sanitation, water, and power needs in these states, with key
achievements, including the introduction of 24-hour power supply and substantial improvements in
access to potable water on Weno Island (Chuuk), along with the rehabilitation of the sewerage
network in Kolonia (Pohnpei). This project has been complemented by technical assistance to
strengthen the administration of public utility corporations in Chuuk, Kosrae, and Yap.
The Yap Renewable Energy Development Project (totaling $9m), approved in 2013, is underpinning
the development of the energy network in Yap. The project focuses on the development of
renewable energy to reduce dependency on imported diesel fuel, and to raise energy efficiencies on
the supply side of the current electricity grid. Project resources are also being utilized to support
capacity development of the Yap power utility and communities.
The ten loans are for: (i) Fisheries Development Project; (ii) Public sector reform program; (iii) Water Supply and
1
Sanitation Project; (iv) Basic Social Services Project; (v) Private sector development program; (vi) Private sector
development project; (vii and viii) Omnibus infrastructure Development; and (iv and x) Yap Renewable Energy
Development.

Table 1. Loans to the Federated States of Micronesia by Sector

(In millions of U.S. dollars, as of December 2014)
Sector No. Amount
Agriculture and Natural Resources 1 6.5
Energy 2 9.0
Industry and Nonfuel Minerals 0 0.0
Transportation 0 0.0
Communications 0 0.0
Law, Economic Management and Public Policy 3 31.0
Water Supply, Sanitation & Waste management 1 10.6
Multisector 3 27.0
Other 0 0.0
Total 10 84.2
Memorandum:
47 27.2
Technical Assistance Provided
Table 2. Loan Approvals and Disbursements to the FSM, 2005–11

1990-
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2014
Loan Approvals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.0 0.0 84.2
Loan Disbursements 1.7 2.5 3.6 3.6 0.8 1.1 6.3 2.5 3.0 3.1 41.2
Undisbursed Balance
(at the end of the 18.5 36.5 29.7 23.8 19.0 17.7 11.4 8.9 15.0 11.4
year)
Memorandum:
0.0 0.6 0.4 0.8 0.0 0.0 0.7 1.1 0.2 0.6 27.2
TA Approval
Undisbursed balance includes only effective loans. The 2005 figure excludes loans not yet effective amounting to
$18.6M.

RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL

ASSISTANCE CENTRE (PFTAC)—COUNTRY STRATEGY
2015–17
Background
After positive growth for the past 4 years (FY2009–12), the FSM experienced the largest
contraction of 4.0 percent in FY2013 since FY1997. While growth is expected to pick up in FY2014
and 15, helped in part by a rebound in implementation of capital grants, persistent difficulties in the
investment climate, combined the scheduled declines in Compact sector grants, are likely to hold the
growth in the medium term. Continued efforts to advance tax reforms, targeted expenditure cuts,
and structural reforms to spur private sector growth are essential to secure long-term fiscal and
economic sustainability.
FSM has been a moderate user of PFTAC Technical Assistance (TA). The most significant input
has been in the revenue area where PFTAC has supported the design of revenue policy and
administration reforms, including the drafting of legislation that awaits approval. There has also been
input in PFM, most recently through support for a PEFA assessment, and financial sector supervision
including credit union reform.
Strategy 2015–17
PFTAC’s TA strategy is guided by the Fund’s overall capacity development framework and APD’s
Regional Strategy Note (RSN) and is consistent with the PFTAC’s results framework.
PFTAC TA aims to support the authorities continue to move towards long-term fiscal
sustainability. Activities will focus on assisting the authorities achieve tangible results from the
foundations laid with previous PFTAC assistance, and will include strategic support in the PFM area
and the modernization of tax compliance. Financial sector work will also continue, with technical
advisory support with the on-site examinations of commercial banks. The IMF Legal department is
completing the review of the Credit Union Act and PFTAC’s Technical Advisor will be providing
capacity building to the Banking Commission on how to adequately perform the oversight of credit
unions.
In the Public Financial Management area, the focus will be on completing the PEFA assessment
and supporting the authorities to develop a PFM roadmap. Activities to support the roadmap’s
implementation will be planned in coordination with other partners, in particular the ADB, but are
expected to include strengthened cash management. In addition, PFTAC, together with IMF HQ, may
consider providing TA to help ensure long-term sustainability of the pension system.
In the revenue area, the nature of assistance will be dependent on the progress in
implementing the tax reform package, designed with PFTAC-assistance. The recent

establishment of the Unified Revenue Authority, as per agreement between the national government
and two state governments (Chuuk and Kosrae), is expected to open new possibilities for engaging
with the FSM authorities and allow to keep the momentum in implementing the tax reform package
in full. During the period of this strategy, PFTAC will focus on assisting the authorities in modernizing
the tax administration, in particular, to improve tax compliance.
FSM’s economic statistics are mainly produced by Compact-funded projects and input is
therefore expected to be relatively limited in this area in the short-term. Provided adequate
staffing remains available in the statistics office, PFTAC will look to support enhancements in the
range of national accounts aggregates that are produced and provide hands-on training in
compilation methods while IMF HQ will offer support on balance of payments development.
In financial sector supervision, PFTAC will continue providing assistance to the Banking
Commission, in particular, to modernize legislations related to credit unions and to strengthen
off-site reporting through the implementation of enhanced prudential returns and better, more-
automated analysis. Emphasis will be on providing technical support with the preparedness and
execution of on-site examinations of commercial banks, including strengthening its ability to assess
banks using the CAMELS ratios analysis and composite rating approach. PFTAC will coordinate with
IMF HQ and other TA providers to ensure that the insurance commission has access to suitable
capacity building but is unlikely to be able to devote significant resources to this area given resource
constraints and that insurance does not feature in PFTAC’s Phase IV’s results framework.
In macroeconomics, no direct input is currently anticipated. However, support to forecasting

of long-term economic scenarios may be provided, in cooperation with other TA providers, in
particular the ADB.

STATISTICAL ISSUES
As of March 31, 2015
I. Assessment of Data Adequacy for Surveillance
General: Data provision has serious shortcomings that significantly hamper surveillance. In particular, data on
national accounts, government finance and balance of payment statistics are not released in a timely manner. The
Fund, including through PFTAC, is providing TA to help build Micronesia’s statistical capacity.
National Accounts: External consultants funded by the U.S. Department of Interior (DoI) have prepared the
national income accounts from FY1995 to FY2013. Some shortcomings remain, for instance, fixed ratios in
estimating value added and the absence of investment/savings indicators. Significant progress has been made in
improving staff capacity through PFTAC training, in collaboration with the DoI consultants.
Price Statistics: A quarterly consumer price index (CPI), rebased to Q2 2008 and utilizing expenditure weights
derived from an earlier household survey, is published for the Federated State of Micronesia (FSM) as a whole and
for each state. However, the data releases are delayed, which makes it difficult to make accurate and timely
evaluation of domestic price movements.
Government Finance Statistics: The national and the state governments and public sector enterprises publish
annual audit reports detailing their fiscal operations; consultants put these data in a GFS format, though with a lag
of about one year. Further improvements in the quality and timeliness of the fiscal data depend on greater
cooperation between the national and state governments. Micronesia has started to present fiscal data, including
balance sheet and debt data, for budgetary central government using the Government Finance Statistics
Manual 2001 (GFSM 2001) format since FY2013 through participation in the JSA regional GFS project. Work to
expand coverage and improve periodicity is continuing.
Monetary and Financial Statistics: The Banking Commissioner reports monthly monetary data. The data
comprise interest rates, commercial banks, and the FSM Development Bank.
Financial sector surveillance: Currently, Micronesia does not report FSIs to the Fund.
External sector statistics Micronesia reported annual balance of payments and international investment position
statistics to STA for the first time in 2014. The statistics were published in the 2014 Balance of Payments Statistics
Yearbook. The Office of Statistics, Budget & Economic Management, Overseas Development Assistance and
Compact Management (SBOC) is the agency responsible for the compilation of external sector statistics (ESS).
Micronesia is a beneficiary of the JSA Project on the Improvement of ESS in the APD region. As part of this Project
Micronesia has received four TA missions on ESS and taken part in four workshops on ESS compilation, and has
been improving ESS by implementing the mission’s recommendations.
II. Data Standards and Quality
Micronesia has been participating in the IMF’s General Data ROSC is not available.
Data Dissemination System since November 2014.

MICRONESIA: TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE

As of March 31, 2015
Date of Date Frequency Frequency Frequency
latest received of of of
7 7
observation Data Reporting publication
7
International Reserve Assets and Reserve Liabilities Jan. 2015 Mar. 2015 M M M
of the Monetary Authorities
Reserve/Base Money NA NA NA NA NA
Broad Money Jan. 2015 Mar. 2015 M M M
Central Bank Balance Sheet NA NA NA NA NA
Consolidated Balance Sheet of the Banking System Nov. 2014 Jan. 2015 M M NA
2
Interest Rates Nov. 2014 Jan. 2015 M M M
Consumer Price Index 2015Q1 Mar. 2015 Q A I
Revenue, Expenditure, Balance/Composition of Nov 2014 Jan 2015 M A A

3 4
Financing General Government and Central
Government
Stocks of Central Government and Central FY2013 Sep. 2014 A A A

5
Government-Guaranteed Debt
External Current Account Balance 2013 Dec. 2014 A A A
Exports and Imports of Goods and Services 2013 Dec. 2014 A A A
GDP/GNP FY2013 Aug. 2014 A A A
Gross External Debt FY2013 Sep. 2014 A A A
International Investment Position 6 Nov. 2014 Jan. 2015 M A A
1. U.S. dollar is circulating as the legal tender in Micronesia.

2. Include the interest rates on consumer loans and commercial loans. Deposit rates are received annually with latest observation
for 2011.
3. Foreign, domestic bank, and domestic nonbank financing.
4. The General Government consists of the central government and state and local governments.
5. Government debt data disclosures do not include government debt guarantees to borrowing by states and public enterprises,
mainly from the Asian Development Bank (ADB). Additionally, information on currency and maturity composition of debt is not
disseminated. However, information related to borrowing from ADB can be obtained from the latter.
6. Includes external gross financial asset and liability positions vis-à-vis nonresidents.
7. Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA)

FEDERATED STATES OF
MICRONESIA
STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—
April 24, 2015 DEBT SUSTAINABILITY ANALYSIS
Approved By Prepared by Staff of the International Monetary Fund

Patrizia Tumbarello and and the International Development Association.
Masato Miyazaki (IMF)
Satu Kahkonen (IDA)
The first joint Bank-Fund Debt Sustainability Analysis assesses the Federated States of Micronesia
(FSM) to be at high risk of debt distress. Under the baseline scenario that does not assume the
implementation of the long-debated tax and growth-enhancing structural reforms, two debt indicators,
namely, the present value of debt-to-GDP and debt-to-exports ratios are projected to exceed the
indicative thresholds in the medium term. PV of public debt-to-GDP ratio will also rise gradually, while
remaining under the threshold during the projection period. This points to the importance of
undertaking further reforms, in particular those critical to enhancing growth and revenue, in order to
bring the debt trajectory to a sustainable level.
Background
1. The FSM is a 607-island microstate in the Pacific, composed of four states with a total
population of slightly above 100,000. It is highly dependent on external aid provided mostly by the
United States while adopting the U.S. dollar as legal tender. The loosely federated structure of the country
makes policy decisions a complex task, as consensus across the national and the four state governments is
required. This has hindered a number of critically important policy actions, including the long-debated tax
reform package (introduction of a VAT in lieu of the state sales taxes and replacing the Gross Revenue Tax
with a net income tax on corporations, among others, which will generate additional revenue of 4 percent
of GDP) and growth-enhancing reforms, in particular, those related to address land tenure issues.
2. The FSM faces a long-term fiscal challenge as U.S. grants provided under the Compact of
Free Association (Compact grants) will expire in FY2023, while the private sector is yet to become an
engine of growth. A portion of the Compact grants has been disbursed into the Compact Trust Fund
(CTF), jointly managed by the US and the FSM, with the intention that returns from the trust fund would
contribute to Micronesia’s fiscal sustainability after FY2023. 1, 2 The FSM has also established its own trust
fund (FSM Trust Fund). However, at current pace of accumulation, returns from the trust funds are expected
to fall short of the expired Compact grants in FY2023.
3. The FSM’s debt management has been relatively prudent. The FSM’s external public and
publicly guaranteed (PPG) debt has been declining slowly from the peak of 31 percent of GDP in FY2009 to
27 percent in FY2013 (22 percent on present value (PV) basis). Most of the debt is concessional and is
contracted with official lenders. About two thirds is from the Asian Development Bank (ADB). Loans from
the US Department of Agriculture (Rural Development Program) account for about one third of the total
external PPG. The rest is from other bilateral and private lenders. Domestic debt is estimated to be less than
1 percent of GDP. All of the loans are denominated in U.S. dollars, legal tender in the FSM.
4. The analysis is based on the standard DSA framework for Low-Income Countries. Debt
sustainability is assessed in relation to policy-dependent debt burden thresholds. The FSM, with an average
score of 2.7 between 2011 and 2013 for the Country Policy and Institutional Assessment (CPIA), is
considered to have weak capacity. The DSA uses the indicative thresholds on the external public debt for
countries in this category whose remittances are not large3: 30 percent for the PV of debt-to-GDP ratio;
100 percent for the PV of debt-to-exports ratio; 200 percent for the PV of debt-to-revenue ratio; 15 percent
for the debt service-to-exports ratio; and 18 percent for the debt service-to-revenue ratio.
5. The key assumptions are consistent with the macroeconomic framework set out in the
Policy Note (Box 1). The baseline scenario assumes that the annual real GDP growth rate will be on
average 0.6 percent in the medium term, which reflects the historical track record of the FSM. Despite the
fiscal consolidation efforts under the Long-Term Fiscal Frameworks (LTFF) by all the state governments to
reduce their expenditures by 1–2 percent per year in real terms throughout the projection period, the
overall fiscal balance will worsen gradually, turning from surplus to deficit from FY2024. While the fiscal
deficit is assumed to be phased out gradually during the remaining 10 years of the projection period
through further fiscal consolidation, the financing gap is assumed to be filled by bilateral concessional
1
The Compact Trust Fund (CTF) was created to contribute to the long-term budgetary self-reliance of the FSM and
provide the FSM government with an ongoing source of revenue after FY2023. The amended Compacts and their
subsidiary agreements contain no commitments, either express or implied, regarding the level of the revenue that
will be generated by the trust fund, nor is there any commitment regarding the degree to which the revenue will
contribute to the long-term budgetary self-reliance of the FSM.
2
Compact grants disbursed in FY2013 for current and capital spending amounted to 25 percent of GDP. If
contributions to the CTF are included, the ratio rises to more than 30 percent of GDP.
3
Under the standard Debt Sustainability Framework for Low-Income Countries, large remittances are defined as both
greater than 10 percent of GDP and greater than 20 percent of exports of goods and services. In the case of the FSM,
the ratio of remittances-to-GDP is around 4 percent while that of remittances-to-exports of goods and services is
around 15 percent.

external borrowing to safeguard priority development spending.4 The baseline scenario does not assume
major policy changes such as the implementation of the long-debated tax reform package.
6. Other assumptions under the baseline scenario include: gradual reduction of the financial
assistance as scheduled under the Compact of Free Association with the US before expiring in FY2023;
continued robust fishing license fee revenues (15 percent of GDP throughout the projection period5), which
helps strengthen the fiscal balances compared to the historical track record; increased allocation of budget
for infrastructure projects from the national to state governments (3 percent of GDP) starting from FY2015,
on account of continued stronger fishing license fees than before; transfer of half of the annual fiscal
surplus to trust funds established to generate revenue after the expiration of financial assistance under the
Compact in FY2023, reflecting on-going discussions in the country. 6 Additionally, the baseline scenario
assumes that the FSM authorities will continue to contract moderate amount of concessional loans to
finance investment projects implemented by state enterprises in line with the newly adopted ODA Policy.
PPG External Debt Sustainability
7. Under the baseline scenario, two of the debt indicators are projected to breach the
indicative thresholds from FY2027–30 and onwards. The ratio of PV of external PPG-to-GDP is expected
to exceed the threshold of 30 percent in FY2030 while the ratio of PV of external PPG debt-to-exports is
expected to exceed the threshold of 100 percent in FY2027. However, as the authorities will strengthen
fiscal consolidation efforts while safeguarding priority spending, the debt indicators will be stabilized
toward the end of the projection period, albeit at levels above the indicative thresholds. As the bulk of
external PPG debt is on concessional terms, the debt service to export ratio will remain below the relevant
threshold.
8. Stress tests confirm the vulnerability of the debt position relative to exports. In the most
extreme shock scenario - with export value growth in FY2015–16 one standard deviation below the
historical average - the PV of the external PPG debt-to-GDP will exceed the threshold of 30 percent
in FY2023, 7 years earlier than the baseline scenario. The PV of the external PPG debt-to-exports ratio will
exceed the threshold of 100 percent in FY2021, and will reach above 200 percent in FY2034.
4
The recently adopted “ODA Policy of the FSM” provides, among others, that loans, as means of financing initiatives,
shall only be considered if concessional in nature and where the estimated economic returns outweigh debt
obligations.
5
Fishing license fee revenue increased from 6 percent of GDP in FY2011 to 15 percent of GDP in FY2014. The “Nauru
Agreement Concerning Cooperation in the Management of Fisheries of Common Interest”, a regional agreement that
sets minimum benchmark fees for foreign fishing companies operating in the region, has strengthened the
bargaining power of its signatories including the FSM. Under this system, fishing companies pay a flat fee per vessel
per day with adjustment for the size of the vessel (VDS: Vessels Day Scheme). The FSM authorities assume that
fishing license fee revenue will be sustained in the medium term, despite the recent plunge in the price of tuna (from
the peak of $2,520 per ton in the third quarter of 2012 to $1,670 per ton in the fourth quarter of 2014).
6
Another half is assumed to be used for other purposes, including the proposed “2023 Investment Development
Fund” that envisages providing equity funds to private sector projects from a long-term perspective.

9. Policy actions, in particular, growth-enhancing and fiscal reforms, would greatly reduce the
risk of debt distress. Under the alternative scenario with policy actions, GDP and exports growth rates are
assumed to be stronger from the baseline by 1 percent per year. Furthermore, the implementation of
further fiscal consolidation including the long-debated tax reform package will eliminate the financing gap
in the post-2023 period, resulting in less borrowing. 7 Under this alternative scenario with policy actions, the
debt indicators will remain well below the threshold throughout the projection period.
PV of debt-to GDP ratio PV of debt-to-exports ratio

35 140
30
120
25
100
20
80
15
60
10
40
Alternative Scenario
5 Alternative Scenario
Threshold 20
Baseline Threshold
0 Baseline
0
2014 2019 2024 2029 2034
2014 2019 2024 2029 2034
Public Sector Debt Sustainability
10. Total PPG debt follows very closely the dynamic of PPG external debt. Under the baseline
scenario, the PV of PPG debt-to-GDP ratio is projected to increase gradually from 22 percent of GDP in
FY2014 to reach 32 percent of GDP in FY2034, but still below the threshold of 38 percent. Continued robust
fishing license fee revenues at 15 percent of GDP (see paragraph 6 and footnote 5), coupled with the fiscal
consolidation efforts by the state governments under the LTFF, explain the significant improvement from
the historical scenario.
Authorities’ View
11. The authorities broadly concurred with the overall assessment of the Debt Sustainability
Analysis. They saw the critical need for achieving a national consensus for implementing policy actions
included in the recently adopted “2023 Action Plan”, in particular, the tax reform package and improving
7
Growth-enhancing policy actions include such measures as regulatory reform (investor protection and transparency
in investment) and a land reform (completion of the land survey and record of land titles available for development).
Regarding policy actions in the fiscal area, the policy action scenario assumes gradual implementation of the tax
reform package between FY2016 and FY2019, generating additional revenue of 4 percent of GDP when implemented
in full. In addition to the fiscal consolidation efforts by the state governments under the LTFF, the policy action
scenario assumes additional expenditure contraction by 1 percent of GDP. The entire fiscal surplus is transferred to
the trust funds. These actions lead to larger investment income from the trust funds in the post-2023 period,
allowing the authorities to avoid additional borrowing.

the business environment. The authorities also noted the need for further consolidating the institutional
capacity to manage debt, as called for in the “2023 Action Plan”.
Conclusion
12. The standard DSA framework for LICs assesses the FSM to be at high risk of debt distress.
The baseline scenario indicates that the PV of external debt-to-GDP and exports ratios could breach the
threshold between FY2027–30 and onwards. PV of public debt-to-GDP ratio will also rise gradually, while
remaining under the threshold during the projection period. Stress tests also confirm the vulnerability of
the debt position relative to exports. However, FSM’s vulnerability to debt distress is mitigated by a number
of factors. Most debt is on concessional terms and from development partners, the decline in external
support from the Compact will be gradual, sheltering the country from the risk of a sudden stop in foreign
financing, and the authorities are building up trust funds that will provide a stable source of funding after
FY2023.
13. The risk of debt distress is reduced under the alternative scenario where long-debated tax
and growth-enhancing structural reforms are implemented. FSM’s debt will be sustainable if the tax
and growth-enhancing structural reforms are implemented, as called for in the recently published “Action
Plan 2023”, though this remains contingent on the achievement of nation-wide consensus in a country with
a loosely federated structure.

Box 1. Micronesia: Baseline Assumptions

GDP growth over the medium term is projected to be around 0.6 percent, reflecting FSM’s track
record.1 The loosely federated structure of the country will continue to weigh heavily on the
implementation of long-debated reforms, particularly in the areas of tax and land tenure issues. In
this context, the private sector will remain largely dependent on the public sector.
The GDP deflator is expected to average about 1.7 percent while the CPI inflation is assumed to
average at around 2.0 percent in the medium term.
The overall fiscal surplus will decline gradually, and turn into deficit from FY2024 before
recovering to balance towards the end of the projection period. Based on recent discussions
in the country, half of the annual fiscal surplus is assumed to be transferred to trust funds to help
sustain fiscal sufficiency after the expiration of financial assistance in FY2023 according to the
Compact of Free Association with the United States. Authorities are assumed to continue the
moderate fiscal consolidation efforts under the Long-Term Fiscal Framework in order to adjust to
the declining Compact grants. No revenue increase from the proposed tax reforms (e.g.,
introduction of a VAT in lieu of the state sales taxes and the replacement of the Gross Revenue
Tax with a net income tax on corporations) is assumed.
External Financing: Compact grants are assumed to decline as scheduled, while grants from
other sources will remain stable in the medium term. Additional financing required to finance
priority investment projects is assumed to be provided by bilateral and multilateral donors on
concessional terms, in line with the recently adopted ODA Policy.
The Compact Trust Fund and the FSM Trust Fund are assumed to yield an average annual
return of 6 percent.2 Draw-downs from the trust funds will start from FY2024. While the baseline
scenario assumes that only the annual investment returns are drawn down and that the nominal
balance of the trust funds will be kept intact, the real value of the trust funds (balance of the trust
funds in percentage of GDP) will decline over time.
The current account deficit is assumed to weaken in the medium term, on account mostly of
declining grants. While the amount of annual draw downs from the trust funds in the post-2023
period will be the same, its ratio against GDP will decline – this will result in the further weakening
of the current account.
1
Average GDP growth between FY2000 and 2013 was 0.4 percent (0.7 percent if excluding FY2013 when the growth rate was
exceptionally low at -4%).
2
Returns from the trust funds have been volatile, reflecting the unusually dismal earnings during the Global Financial Crisis. In
FY2008, CTF net return was negative 19 percent, substantially eroding the market value of the fund. It experienced further
negative returns in FY2009 and 2011, while gain in FY2010 reached 13 percent. Average return between FY2012–14 reached
12 percent, bringing the average return of CTF since its inception in 2004 to 5.3 percent.

Figure 1. Micronesia: Indicators of Public and Publicly Guaranteed External Debt

Baseline Scenario, 2014–34 1/
a. Debt Accumulation b.PV of debt-to GDP ratio

35 45 140
30 40
120
25 35
30 100
20
25
15 80
20
10 60
15
5 10
40
0 5
2014 2019 2024 2029 2034 20
-5 0
0
Rate of Debt Accumulation 2014 2019 2024 2029 2034
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio

600 300
500 250
400 200
300 150
200 100
100 50
0 0
2014 2019 2024 2029 2034 2014 2019 2024 2029 2034
e.Debt service-to-exports ratio f.Debt service-to-revenue ratio

40 25
35
20
30
25
15
20
15 10
10
5
5
0 0
2014 2019 2024 2029 2034 2014 2019 2024 2029 2034
Baseline Historical scenario Most extreme shock 1/

Threshold
Sources: Country authorities; and staff estimates and projections.
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a
Terms shock; in c. to a Terms shock; in d. to a Terms shock; in e. to a Terms shock and in figure f. to a Terms shock
2/ Tax reform package, generating additional revenue of 4 percent of GDP, is assumed to be gradually implemented at
all levels of government between 2016 and 2018. To be implemented, the tax reform package needs to be endorsed by
all the governments (national and state governments).

Figure 2. Micronesia: Indicators of Public Debt,

Most extreme shock Combination
Baseline Fix Primary Balance Most extreme shock 1/
Historical scenario Public debt benchmark
100
PV of Debt-to-GDP Ratio
50
-50
-100
-150
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034
250
200
PV of Debt-to-Revenue Ratio 2/
150
100
50
-50
-100
-150
-200
-250
-300
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034
15
Debt Service-to-Revenue Ratio 2/
10
-5
-10
-15
-20
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.
2/ Revenues are defined inclusive of grants.

Table 1. Micronesia: External Debt Sustainability Framework,

(In percent of GDP, unless otherwise indicated)
6/ 6/
Actual Historical Standard Projections
Average Deviation 2020-2034
2011 2012 2013 2014 2015 2016 2017 2018 2019 2024 2034 Average
External debt (nominal) 1/ 29.1 27.7 27.1 26.4 26.5 26.7 25.6 27.3 28.8 36.0 48.1
of which: public and publicly guaranteed (PPG) 29.1 27.7 27.1 26.4 26.5 26.7 25.6 27.3 28.8 36.0 48.1
Change in external debt -0.4 -1.4 -0.6 -0.7 0.2 0.2 -1.1 1.7 1.5 2.0 0.2
Identified net debt-creating flows 16.7 11.4 11.3 -2.3 0.9 0.8 1.5 2.0 2.7 3.6 7.7
Non-interest current account deficit 17.2 12.0 9.4 13.3 3.6 -3.1 0.1 0.3 1.0 1.6 2.3 3.4 7.7 5.2
Deficit in balance of goods and services 57.4 51.5 54.1 53.4 50.1 50.0 50.0 50.0 50.0 50.6 50.1
Exports 24.4 29.4 28.1 28.7 27.8 28.0 27.9 28.0 27.9 27.1 25.7
Imports 81.8 80.8 82.2 82.1 77.9 77.9 77.9 77.9 77.9 77.7 75.7
Net current transfers (negative = inflow) -36.0 -33.9 -35.3 -39.2 3.6 -41.8 -35.3 -35.0 -34.2 -33.6 -33.0 -14.2 -13.0 -18.4
of which: official -33.5 -31.1 -31.1 -31.0 -30.8 -30.5 -29.7 -29.2 -28.5 -9.8 -8.5
Other current account flows (negative = net inflow) -4.2 -5.6 -9.4 -14.7 -14.7 -14.7 -14.7 -14.7 -14.8 -33.0 -29.4
Net FDI (negative = inflow) 0.3 0.3 0.2 0.0 0.7 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Endogenous debt dynamics 2/ -0.7 -0.8 1.7 0.6 0.5 0.3 0.2 0.2 0.2 0.0 -0.3
Contribution from nominal interest rate 0.7 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.2 0.0
Contribution from real GDP growth -0.5 0.0 1.2 0.0 -0.1 -0.3 -0.2 -0.2 -0.2 -0.2 -0.3
Contribution from price and exchange rate changes -1.0 -1.5 -0.2 … … … … … … … …
Residual 3/ -17.1 -12.8 -11.9 1.6 -0.7 -0.6 -2.6 -0.3 -1.2 -1.6 -7.5
of which: exceptional financing (capital grants) -20.1 -21.0 -13.4 -13.0 7.2 -12.7 -12.7 -13.1 -13.2 -13.3 -13.3 -7.0 -5.6
PV of external debt 4/ ... ... 21.5 20.9 21.0 21.0 20.2 20.9 21.5 24.7 32.3
In percent of exports ... ... 76.7 72.9 75.4 75.3 72.3 74.8 77.2 91.3 125.7
PV of PPG external debt ... ... 21.5 20.9 21.0 21.0 20.2 20.9 21.5 24.7 32.3
In percent of exports ... ... 76.7 72.9 75.4 75.3 72.3 74.8 77.2 91.3 125.7
In percent of government revenues ... ... 80.3 55.9 67.9 68.2 65.5 67.8 69.8 50.4 71.3
Debt service-to-exports ratio (in percent) 6.7 5.3 6.7 7.9 8.0 7.1 6.4 6.2 5.9 5.9 6.4
PPG debt service-to-exports ratio (in percent) 6.7 5.3 6.7 7.9 8.0 7.1 6.4 6.2 5.9 5.9 6.4
PPG debt service-to-revenue ratio (in percent) 7.8 6.8 7.0 6.0 7.2 6.4 5.8 5.6 5.4 3.3 3.7
Total gross financing need (Millions of U.S. dollars) 58.9 45.1 36.1 -1.9 8.2 8.0 10.0 11.9 14.4 20.2 46.5
Non-interest current account deficit that stabilizes debt ratio 17.5 13.3 10.0 -2.4 -0.1 0.1 2.1 -0.1 0.8 1.4 7.5
Key macroeconomic assumptions
Real GDP growth (in percent) 1.8 0.1 -4.0 -0.4 2.5 0.1 0.3 1.0 0.9 0.9 0.8 0.6 0.6 0.6
GDP deflator in US dollar terms (change in percent) 3.4 5.3 0.6 3.0 1.7 0.0 0.0 0.0 1.8 1.3 1.9 1.7 1.7 1.7
Effective interest rate (percent) 5/ 2.7 2.4 2.4 2.6 0.1 2.2 2.1 2.0 1.8 1.8 1.5 0.6 0.0 0.4
Growth of exports of G&S (US dollar terms, in percent) 8.3 27.0 -7.7 7.6 14.1 2.4 -3.0 1.5 2.7 2.3 2.4 1.7 1.8 1.7
Growth of imports of G&S (US dollar terms, in percent) 5.8 4.3 -1.9 3.7 4.8 0.0 -4.9 1.0 2.7 2.2 2.7 2.0 2.1 2.1
Grant element of new public sector borrowing (in percent) ... ... ... ... ... 28.2 28.2 28.2 28.2 41.3 41.3 40.6 41.1 40.9
Government revenues (excluding grants, in percent of GDP) 20.8 22.9 26.8 37.4 30.9 30.9 30.9 30.9 30.9 49.0 45.3 42.8
Aid flows (in Millions of US dollars) 7/ 226.6 230.9 196.9 181.1 181.6 180.4 180.3 189.1 197.7 156.0 248.8
of which: Grants 136.8 140.6 111.7 98.1 97.9 95.3 96.6 97.8 98.8 17.4 15.8
of which: Concessional loans 89.8 90.3 85.2 83.0 83.7 85.1 83.7 91.3 98.9 138.7 232.9
Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 31.4 31.5 30.4 29.8 30.7 30.2 6.2 4.5 11.6
Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 97.9 95.9 95.8 97.8 93.6 93.6 71.3 72.4 77.2
Memorandum items:
Nominal GDP (Millions of US dollars) 309.1 325.9 314.6 314.8 315.7 318.7 327.4 334.7 343.6 385.6 484.4
Nominal dollar GDP growth 5.3 5.4 -3.5 0.1 0.3 1.0 2.7 2.2 2.7 2.3 2.3 2.3
PV of PPG external debt (in Millions of US dollars) 67.7 65.9 66.2 67.1 66.2 70.0 74.0 95.3 156.3
(PVt-PVt-1)/GDPt-1 (in percent) -0.6 0.1 0.3 -0.3 1.2 1.2 1.6 0.9 1.4
Gross workers' remittances (Millions of US dollars) 14.1 14.3 14.4 14.4 14.5 14.5 14.6 14.6 14.7 15.1 16.0
PV of PPG external debt (in percent of GDP + remittances) ... ... 20.6 20.0 20.1 20.1 19.3 20.0 20.7 23.8 31.2
PV of PPG external debt (in percent of exports + remittances) ... ... 65.9 62.9 64.8 64.7 62.4 64.7 67.0 79.7 111.3
Debt service of PPG external debt (in percent of exports + remittances) ... ... 5.7 6.8 6.9 6.1 5.6 5.4 5.2 5.2 5.7
Sources: Country authorities; and staff estimates and projections. 0

1/ Includes both public and private sector external debt.
2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.
3/ Includes exceptional financing (i.e., capital grants); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.
4/ Assumes that PV of private sector debt is equivalent to its face value.
5/ Current-year interest payments divided by previous period debt stock.
6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
7/ Defined as grants, concessional loans, and debt relief.
8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2. Micronesia: Sensitivity Analysis for Key Indicators

of Public and Publicly Guaranteed External Debt, 2014–34
(In percent)
Projections
2014 2015 2016 2017 2018 2019 2024 2034
PV of debt-to GDP ratio
Baseline 21 21 21 20 21 22 25 32
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/ 21 29 37 44 52 60 94 127

A2. New public sector loans on less favorable terms in 2014-2034 2 21 21 22 21 23 25 33 52
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 21 22 23 22 22 23 27 35
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 21 22 24 23 24 24 27 34
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 21 21 21 20 20 21 24 31
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 21 21 21 20 21 21 25 32
B5. Combination of B1-B4 using one-half standard deviation shocks 21 19 17 16 17 17 21 30
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 21 21 21 20 21 22 25 32
PV of debt-to-exports ratio
Baseline 73 75 75 72 75 77 91 126
B. Bound Tests
PV of debt-to-revenue ratio
Baseline 56 68 68 65 68 70 50 71
B. Bound Tests

Table 2. Micronesia: Sensitivity Analysis for Key Indicators

of Public and Publicly Guaranteed External Debt, 2014–34 (concluded)
(In percent)
Projections
2014 2015 2016 2017 2018 2019 2024 2034
Debt service-to-exports ratio

Baseline 8 8 7 6 6 6 6 6

B. Bound Tests
Debt service-to-revenue ratio

Baseline 6 7 6 6 6 5 3 4

B. Bound Tests
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 35 35 35 35 35 35 35 35

1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.
2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.
3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming
an offsetting adjustment in import levels).
4/ Includes official and private transfers and FDI.
5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.
6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 3. Micronesia: Public Sector Debt Sustainability Framework,

Baseline Scenario, 2011–34
(In percent of GDP, unless otherwise indicated)
Actual Estimate Projections

2014-19 2020-34
2011 2012 2013 2014 2015 2016 2017 2018 2019 Average 2024 2034 Average
Public sector debt 1/ 30.0 28.5 27.8 27.1 27.3 27.4 26.3 28.0 29.5 36.6 48.2
of which: foreign-currency denominated 30.0 28.5 27.8 27.1 27.3 27.4 26.3 28.0 29.5 36.6 48.2
Change in public sector debt 0.6 -1.5 -0.7 -0.7 0.2 0.2 -1.1 1.7 1.5 2.0 -0.2
Identified debt-creating flows -0.9 -2.3 -1.8 -12.5 -2.9 -2.9 -3.8 -3.8 -3.5 0.2 -0.9
Primary deficit -0.2 -1.5 -3.5 -13.1 -3.4 -3.2 -3.5 -3.7 -3.2 -5.0 0.8 0.2 -0.2
Revenue and grants 65.0 66.0 62.3 68.6 61.9 60.8 60.4 60.1 59.6 53.5 48.5
of which: grants 44.3 43.1 35.5 31.2 31.0 29.9 29.5 29.2 28.8 4.5 3.3
Primary (noninterest) expenditure 64.9 64.6 58.8 55.5 58.4 57.6 56.8 56.4 56.4 54.3 48.7
Automatic debt dynamics -0.7 -0.9 1.7 0.6 0.5 0.3 -0.2 -0.1 -0.3 -0.6 -1.1
Contribution from interest rate/growth differential -0.4 0.1 1.5 0.1 0.0 -0.2 -0.3 -0.3 -0.4 -0.7 -1.2
of which: contribution from average real interest rate 0.2 0.2 0.3 0.1 0.1 0.0 -0.1 -0.1 -0.2 -0.5 -1.0
of which: contribution from real GDP growth -0.5 0.0 1.2 0.0 -0.1 -0.3 -0.3 -0.2 -0.2 -0.2 -0.3
Contribution from real exchange rate depreciation -0.4 -1.0 0.3 0.5 0.5 0.5 0.1 0.2 0.1 ... ...
Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual, including asset changes 1.5 0.8 1.1 11.8 3.1 3.1 2.6 5.5 5.1 1.8 0.7
Other Sustainability Indicators

PV of public sector debt ... ... 22.3 21.7 21.7 21.8 20.9 21.6 22.2 25.3 32.4
of which: foreign-currency denominated ... ... 21.5 20.9 21.0 21.0 20.2 20.9 21.5 24.7 32.3
of which: external ... ... 21.5 20.9 21.0 21.0 20.2 20.9 21.5 24.7 32.3
PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ...
Gross financing need 2/ 1.5 1.0 -0.7 -10.1 -0.4 -0.5 -1.0 -1.3 -0.9 3.0 2.3
PV of public sector debt-to-revenue and grants ratio (in percent) … … 35.7 31.6 35.1 35.8 34.7 36.0 37.3 47.3 66.8
PV of public sector debt-to-revenue ratio (in percent) … … 83.0 57.9 70.3 70.6 67.8 70.0 72.0 51.6 71.6
of which: external 3/ … … 80.3 55.9 67.9 68.2 65.5 67.8 69.8 50.4 71.3
Debt service-to-revenue and grants ratio (in percent) 4/ 2.5 2.4 3.1 3.4 3.6 3.3 3.0 2.9 2.8 3.1 3.4
Debt service-to-revenue ratio (in percent) 4/ 7.8 7.1 7.2 6.1 7.3 6.6 6.0 5.7 5.5 3.3 3.7
Primary deficit that stabilizes the debt-to-GDP ratio -0.7 0.0 -2.8 -12.4 -3.6 -3.4 -2.4 -5.4 -4.7 -1.2 0.3
Key macroeconomic and fiscal assumptions

Real GDP growth (in percent) 1.8 0.1 -4.0 0.1 0.3 1.0 0.9 0.9 0.8 0.7 0.6 0.6 0.6
Average nominal interest rate on forex debt (in percent) 2.7 2.4 2.4 2.2 2.1 2.0 1.8 1.8 1.5 1.9 0.6 0.0 0.4
Average real interest rate on domestic debt (in percent) ... 0.7 5.1 5.3 5.2 5.3 3.4 3.9 3.3 4.4 3.5 3.5 3.5
Real exchange rate depreciation (in percent, + indicates depreciation) -1.3 -3.4 0.9 1.7 ... ... ... ... ... ... ... ... ...
Inflation rate (GDP deflator, in percent) 3.4 5.3 0.6 0.0 0.0 0.0 1.8 1.3 1.9 0.8 1.7 1.7 1.7
Growth of real primary spending (deflated by GDP deflator, in percent) -1.4 -0.4 -12.5 -5.7 5.7 -0.6 -0.3 0.1 0.8 0.0 -0.9 -0.5 -0.4
Grant element of new external borrowing (in percent) ... ... ... 28.2 28.2 28.2 28.2 41.3 41.3 32.6 40.6 41.1 ...
1/ [Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]
2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.
3/ Revenues excluding grants.
4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.
5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4. Micronesia: Sensitivity Analysis for Key Indicators of Public Debt 2014–34
Projections
2014 2015 2016 2017 2018 2019 2024 2034
PV of Debt-to-GDP Ratio
Baseline 22 22 22 21 22 22 25 32
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages 22 25 29 32 37 42 62 87
A2. Primary balance is unchanged from 2014 22 16 9 2 -4 -10 -46 -134
A3. Permanently lower GDP growth 1/ 22 22 22 22 23 25 34 73
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-2016 22 23 26 26 28 30 43 74
B2. Primary balance is at historical average minus one standard deviations in 2015-2016 22 29 36 35 36 37 41 48
B3. Combination of B1-B2 using one half standard deviation shocks 22 27 33 33 35 37 46 69
B4. One-time 30 percent real depreciation in 2015 22 31 31 30 30 30 30 33
B5. 10 percent of GDP increase in other debt-creating flows in 2015 22 28 28 28 28 29 33 40
PV of Debt-to-Revenue Ratio 2/
Baseline 32 35 36 35 36 37 47 67
A2. Primary balance is unchanged from 2014 32 25 15 3 -6 -16 -85 -277
B. Bound tests
Debt Service-to-Revenue Ratio 2/
Baseline 3 4 3 3 3 3 3 3
A2. Primary balance is unchanged from 2014 3 4 3 2 2 2 -1 -15
B. Bound tests

1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.
2/ Revenues are defined inclusive of grants.

Press Release No. 15/224 International Monetary Fund
FOR IMMEDIATE RELEASE 700 19th Street, NW
May, 15, 2015 Washington, D. C. 20431 USA
IMF Executive Board Concludes 2015 Article IV Consultation with

the Federated States of Micronesia
On May 11, the Executive Board of the International Monetary Fund (IMF) concluded the
2015 Article IV consultation1 with the Federated States of Micronesia (FSM).
Micronesia’s economy is stagnating, as externally-funded infrastructure projects are moving

slowly while difficulties in the business climate, in particular those related to land tenure
issues, continue to hold back private sector development. Staff estimates real GDP growth of
around 0.1 percent for the fiscal year 2014 (ending September), while inflation has dropped
to 0.7 percent on the back of falling oil prices. The current account strengthened in to
2½ percent of GDP in 2014, due mostly to a one-off increase in tax revenues and an increase
in fishing license fees. Growth in 2015 is projected to remain subdued at 0.3 percent, while
consumer prices are projected to further decline to -1.0 percent thanks to the continued pass
through of low oil prices.
The Micronesian economy is projected to grow at 0.6 percent in the medium term, while
risks on the outlook are tilted to the downside. The expiration in 2023 of grants provided
under the Compact of Free Association with the United States is a significant challenge for
Micronesia, requiring the country to implement wide-ranging reforms to enhance fiscal
sustainability and private sector growth. Damages caused by the recent Typhoon Maysak
have revealed again Micronesia’s vulnerability to tropical cyclones, while disaster assistance
arrangements with the United States help the nation to recover from those damages.
Some reforms have been started recently, in particular, fiscal consolidation efforts by the
state governments under the Long-Term Fiscal Frameworks (LTFF) and the establishment of
the Unified Revenue Authority (URA). A new legislation on credit unions is being prepared
to extend the supervisory authority of the Banking Board. The recently produced “2023
1
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members,
usually every year. A staff team visits the country, collects economic and financial information, and discusses
with officials the country's economic developments and policies. On return to headquarters, the staff prepares a
report, which forms the basis for discussion by the Executive Board.
2
Action Plan” shows further policy actions that are required, including the implementation of
the tax reform package and regulatory reforms. Most of these policy actions will require
legislative measures – hence the critical importance in achieving a wide consensus in a nation
with a loosely federated structure.
Executive Board Assessment2
Executive Directors noted that medium-term growth prospects in the Federated States of
Micronesia (FSM) remain weak given sluggish private sector activity, while fiscal challenges
loom ahead, in particular, with the expiration of Compact grants in 2023. They also
expressed concern about the impact of the damage caused by Typhoon Maysak in April,
notwithstanding the provision of emergency assistance by the international community.
Directors stressed the importance of critical fiscal and structural reforms to help lift the
economy’s growth prospects and achieve fiscal sustainability beyond the expiration of the
Compact grants.
Directors called for the formulation of a realistic long-term fiscal framework based on a wide
consensus across the national and four state governments, with a view to achieving budgetary
self-reliance in the post-2023 period. While commending recent progress—including the
establishment of the Unified Revenue Authority, the transfer of the 2014 fiscal surplus to the
FSM trust fund, and the start of the Long-Term Fiscal Framework by the state
governments—Directors encouraged the authorities to redouble their efforts in strengthening
fiscal consolidation. They advised swift implementation of the long-debated tax reform
package, in order to raise the revenue-to-GDP ratio closer to regional averages. Directors
also noted the scope for improved prioritization of public spending, including through wage
moderation and expedited implementation of an updated infrastructure development plan.
Directors emphasized that improving the investment climate is key to achieving private-
sector-led growth in the FSM. They encouraged the authorities to undertake growth-
enhancing policy actions, particularly by addressing land tenure issues through land surveys
and registration. Efforts to strengthen investor protection and contract enforcement, and
expedited investment application approvals would also help to attract foreign direct
investment. In this regard, attention should be paid to safeguarding FSM’s cultural heritage
and pristine environment. Directors also supported greater bank credit expansion, including
to SMEs, in order to help boost economic activity and promote diversified growth. They
2
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views
of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any
qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
3
noted that business skills of SMEs should be strengthened to support formulation of more
bankable business projects.
Directors agreed that expanding regulatory oversight of credit unions would help to preserve
financial stability. They supported the authorities’ efforts to prepare a new Credit Union Act
that places credit unions under the supervision of the Banking Board, with technical
assistance from the Pacific Financial Technical Assistance Centre(PFTAC).
Directors encouraged the authorities to redouble efforts to strengthen the capacity to produce
timely economic statistics, with technical assistance from the Fund and other donors.
4
Micronesia: Selected Economic Indicators, FY2010–15 /1

Nominal GDP (FY2013): US$315 million
Population (FY2013): 103,679
GDP per capita (FY2013): US$3,034
IMF Quota: SDR 5.1 million
FY201
FY2010 FY2011 FY2012 FY2013 FY2014 5
Est. Proj.
Real sector (annual percent change)
Real GDP 3.2 1.8 0.1 -4.0 0.1 0.3
Consumer prices 3.7 4.3 6.3 2.1 0.7 -1.0
Employment 3.9 1.7 -2.6 -2.0 0.0 0.1
Public (incl. public enterprises) 1.1 -0.4 -0.8 -0.7 0.0 0.0
Private 7.1 3.8 -4.8 -3.9 0.1 0.2
Nominal wages 2.7 0.4 3.8 1.6 1.8 1.9
public average wage/private average wage 2.2 2.1 2.0 2.0 2.0 2.0
Consolidated government finance (in percent of GDP)
Revenue and grants 68.2 65.0 66.0 62.3 68.6 61.9
Revenue 21.6 20.8 22.9 26.8 37.4 30.9
Grants 2/ 46.6 44.3 43.1 35.5 31.2 31.0
Expenditure 67.8 65.6 65.3 59.6 56.1 59.0
Current 46.9 45.6 44.2 45.9 46.0 45.5
Capital 20.8 20.0 21.1 13.7 10.1 13.6
Overall balance 0.5 -0.6 0.8 2.8 12.5 2.8
Overall balance (exc. Grants) -46.1 -44.8 -42.4 -32.8 -18.7 -28.2
Commercial banks (in percentage of GDP; end of period)
Loans 19.0 17.9 17.4 17.2 18.0 …
Deposits 52.5 53.8 62.7 67.8 75.4 …
Interest rates (in percent, average for FY)
Consumer loans 14.9 14.4 14.2 15.7 15.7 …
Commercial loans 6.6 6.6 6.4 6.4 6.4 …
Trade balance -128.4 -134.0 -125.7 -131.1 -129.2 -119.1
Net services and income -29.8 -32.5 -25.8 -11.7 5.5 5.6
Private and official transfers 113.8 111.2 110.3 111.1 131.7 111.4
Current account -44.4 -55.3 -41.2 -31.6 8.0 -2.1
(in percent of GDP) -15.1 -17.9 -12.6 -10.1 2.5 -0.7
Current account excluding official transfers -153.4 -158.9 -142.5 -129.6 -89.6 -99.4
(in percent of GDP) -52.2 -51.4 -43.7 -41.2 -28.5 -31.5
External debt (in millions of U.S. dollars; end of period) 3/
Stock 86.4 89.8 90.3 85.2 83.0 83.7
(in percent of GDP) 29.4 29.1 27.7 27.1 26.4 26.5
Debt service 4.4 5.0 5.1 5.9 7.1 7.0
(in percent of exports of goods and services) 6.3 6.7 5.3 6.7 7.9 8.0
Exchange rate regime U.S. dollar is the official currency
Real effective exchange rate 4/ 109.9 109.5 112.4 115.1 115.8 n.a.
1/ Fiscal year ending September 30.
2/ Excludes grants to the Compact Trust Fund.
3/ Government and public enterprise debt only.
4/ Calendar year. 2003=100.
Statement by KwangHae Choi, Alternate Executive Director
and Hyunjoon Lim, Government-Provided Advisor to the Executive Director
May 11, 2015
Background
On behalf of the Micronesian authorities, we appreciate staff’s well-organized and informative

assessment of the developments in the economy and the constructive dialogue with the
authorities.
The Federated States of Micronesia is a small Pacific island country which consists of four
autonomous states guaranteed by its constitution. Such autonomy and the geographical
dispersion among each state make it challenging to achieve social consensus on important
issues.
The most serious challenges facing Micronesia include concerns related to grants from the
United States which recently account for 25~30 percent of GDP. Grants are expected to expire in
FY2023. Therefore, the FSM’s sustainable growth in the long term will hinge on moving forward
the fiscal reforms in preparation for the expiration of grants, and fostering a larger role for the
private sector as a new engine of growth.
To address these challenges, the authorities recently initiated “Action Plan 2023” which aims at
addressing the fiscal and economic challenges leading up to and post FY2023. The Action Plan
targets achieving the FSM’s annual real growth rate of 2 percent, creating an environment for
private sector-driven growth, and strengthening fiscal consolidation over the remaining years at
the Compact.
In this regard, while the authorities broadly agree with staff on the outlook, ambitious reforms
and favorable development of global economy would play a pivotal role in helping to revive the
economic activity.
In addition, pursuing sustainable growth, the authorities highly appreciate the staff’s assessment
and recommendation. In particular, staff’s recommendations related to achievement of the
sustainable growth are largely in line with the Action Plan 2023, which are to promote the
country’s economic development, budgetary self-reliance, and economic self-sufficiency.
Economic Outlook
The authorities broadly agree with staff’s assessment of the outlook. However, the authorities
believe that there is a range of upside risks that could materialize, particularly with
implementation of reforms. Specifically, the authorities believe that the FSM’s economy will be
able to regain the momentum to 2 percent per annum on average over the remaining periods of
the Compact in case the country radically realigns its productive capacity by undertaking key
factors contained in the Action Plan and being helped by favorable factors as follows:
 Fishing and tourism are expected to benefit from favorable external factors such as lower oil
prices and the gradual recovery of global economy.
 The authorities continue to have dialogue with the stakeholders to address the unused
balance of allocated Compact grants for infrastructure projects. The authorities seek to
accelerate the spending on the infrastructure arrears of $126 million over the next four years,
and thereby help to reinvigorate the economy.
 Last but not least, the authorities believe that an additional upside risk could arise from the
positive effects of the structural reforms on external and domestic confidence.
Pursuing Sustainable Growth
Fiscal Policy
Staff pointed out that from 2024 onwards, the FSM will face serious fiscal deficits without any
interventions or reforms. A key challenge in fiscal reforms for the country is that the fiscal policy
is implemented individually by the central and state governments, with separate expenditure and
revenue policies. The authorities agree on the need to put in place both revenue and expenditure
reforms that reflect the country’s long term objectives.
On the revenue front, the authorities highly appreciate staff’s emphasis on the central
importance of improved tax administration and tax reforms.
 The authorities plan to lift a currently low tax-to-GDP ratio of 12 percent up to as high as 16
percent through a series of tax reforms, including through introduction of a value added tax
and net profits tax.
 Going forward, the authorities seek to extend the URA to the remaining two states, enhance
the current operations of the state and national tax offices, and broaden personnel training
in anticipation of the broader tax reform.
This will be supported by sustained utilization of technical assistance from the Pacific Forum
Secretariat (PFTAC) and other development partners, incorporating wherever possible the lessons
from the experiences of comparable Pacific island countries that have already undertaken such
reforms. Complimenting these efforts and standing critical to the success of the reforms, will be a
more targeted public awareness program regarding the reforms.
On the expenditure front, a key policy objective is the need for national and state governments
to limit their expenditure growth to 2 percent per annum over the medium-to- long term and
thereby see total expenditure of government continue to decline as a percent of GDP by allowing
expenditure to keep track of inflation levels.
 In particular, the authorities view the recent launch of state-level effort towards consolidation
under the Long-Term Fiscal Frameworks (LTFF) as important progress, and moreover
highlight their strong resolves to extend the LTFF to the national government level.
 Concerning the large wage bill, the authorities note that salaries have been frozen since 1997
through a decision of Congress. The government recently undertook a public administration
reform project, under which it reviewed not only the salary freeze but also number of staff,
payment structures, and staff grading etc and is in the process of implementing the findings.
The authorities seek to strike right balance between revenue enhancing measures and revenue
sharing. In considering any revenue sharing with the states, the national government will seek to
ensure that the states take appropriate and corresponding measures, including enabling tax
reform legislation, improving the investment environment, and implementing expenditure
reforms.
Private Sector Development
The authorities fully agree with staff that improving the investment climate is key to achieving
private sector-led growth. They also acknowledge that compact grants, no matter how efficiently
administered, will not lead to better economic performances by 2023 without substantially
rebalancing sector grant usage to focus on private sector growth, that leads to achieving
budgetary self- reliance and economic self-sustainability. Despite the authorities’ steadfast
resolve to generate a business-friendly climate, it will be challenging to achieve social consensus
on the structural problems, including land tenure reform in the near term.
Specific issues for the FSM include dealing with insolvency, contract enforcement, investor
protection, access to credit, property rights, and business start-up challenges as well as land
leases and foreign investment. It is hoped that diverse measures for Regulatory reforms Covered
by the Action Plan 2023 will provide a cornerstone for enhancing protection for foreign investors
and reducing investment-related uncertainty. The Action Plan, in practice, contains diverse
measures and initiatives to expedite the construction of infrastructure which will help to enhance
the competitiveness of tourism and fishery sectors.
Regarding the ownership and leasing of land, the authorities also see merit in reviewing
restrictions imposed by Foreign Investment Acts at both levels of government to harmonize and
provide greater clarity on land tenure practices across the states, while respecting local investors’
legitimate interests. As is the case in other Pacific island countries, the land issue is so delicate
and intricately connected to people’s perception of inheritance and community that it needs to
be tackled sensitively to produce solution that are sustainable in the long term.
Financial Sector
The authorities welcome staff’s appraisal that the commercial banking sector is sound with
adequate capital and ample liquidity. Nevertheless, the authorities continue to extend their
regulatory efforts to credit unions. The authorities also note that continued reliance on the PFTAC
for technical assistance is critical to prepare for a Credit Union Act which will expand the Board’s
supervisory mandate of the Banking Board over credit unions. The newly created Insurance Board
will also benefit from technical assistance from the Fund and other agencies, to enhance its
supervisory capacity and strengthen foreign corporation auditing.
External Stability
We share staff’s view that risks to external stability are relatively contained given that its current
account deficits have largely been financed by concessional foreign grants for infrastructure
projects. Although this nature helps the FSM’s public debt to remain stable and low as a percent
of GDP, the authorities remain mindful of the external risks posed by foreign denominated loans.
Given this, the authorities are committed to closely monitoring the pressures from foreign loans
and the scheduled reduction of Compact grants, on external stability, and will continue their
efforts to reduce heavy external dependence for the energy and foods.

Micronesia 2015 Profile

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IMF Country Report No.

 An Informational Annex prepared by the IMF.

 A Statement by the Executive Director for the Federated States of Micronesia.

Copies of this report are available to the public from

International Monetary Fund  Publication Services

International Monetary Fund

© 2015 International Monetary Fund

ECONOMIC CONTEXT ___________________________________________________________________________ 4

POLICIES TO ACHIEVE SUSTAINABLE GROWTH _______________________________________________ 5

STAFF APPRAISAL _____________________________________________________________________________ 11

2 INTERNATIONAL MONETARY FUND

This makes decision making at the national level 0

2. Growth and social indicators. The

INTERNATIONAL MONETARY FUND 3

Micronesia: Selected Economic Indicators, FY2011-15

4 INTERNATIONAL MONETARY FUND

POLICIES TO ACHIEVE SUSTAINABLE GROWTH

INTERNATIONAL MONETARY FUND 5

revenue is low (12–13 percent of GDP), while the 5

URA should be extended to cover the remaining

Main elements of the tax reform package

6 INTERNATIONAL MONETARY FUND

done to achieve the targeted value of the trust funds 50

(340 percent of GDP) in FY2023. This will require 40

accompanied by improvement in the quality of public

development impact. Micronesia’s overall wage

15. Externally-funded infrastructure projects. The unused balance of already allocated

INTERNATIONAL MONETARY FUND 7

B. Enhancing Private Sector Growth

 Tourism. FSM’s tourism income (7 percent of GDP

Pacific. The recent grant-financed extension of the 60

expanding tourism. The authorities are making 30

destinations in Asia, including by signing open sky 0

agreements and arranging chartered flights.

8 INTERNATIONAL MONETARY FUND

Ease of Doing Business, 2015

Enforcing Contracts 162 100

Dealing with Construction Permits 37

0 50 100 150 200

C. Preserving Financial Stability to Support Growth

land lease and using land as collateral, has resulted in 1600

the number of deposit accounts with commercial 1000

Reflecting the lack of bankable projects, the loan-to- 200

INTERNATIONAL MONETARY FUND 9

onwards in order to safeguard priority developent 12 Net Oil Imports (% of GDP)

23. Impact of lower oil price. The FSM is a net

importer of petroleum products, thus benefitting from 0 0

over the past two decades, rising from 4 percent of

12 Exports of Fish (% of GDP)

decline in oil prices is expected to have positive 6

impact as the FSM is a net oil importer – a 10 percent 4

decline in the imported price of petroleum products is 2 500

estimated to improve the current account balance by 0 0

imported petroleum products, the FSM has started to

work with development partners to invest in

10 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 11

12 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 13

Box 2. Micronesia: Long-term Outlook on Trust Funds

government. In FY2014, CTF had a balance of $381 million 300 300

Scenarios: Two scenarios are considered to assess the

cover the reduction in Compact grants without eroding the 4.0%